Market Update: Greater than the Gulf

 

The deregulation of Mexico’s refined fuels market has been a boon to American firms, particularly those operating in the USGC. But the opportunities made available in Mexico’s emerging market aren’t limited to U.S. companies. In this issue of Market Update we’ll take a look at other countries that are making a play for Mexico, the potential impact of the Valley Crossing Pipeline, and a little number that has big implications for exporters: the foreign exchange rate.

 

Competition From Afar

YES, Pemex refineries are producing at a 27-year low. YES, American firms have greatly benefitted from this lack of supply. BUT, the U.S. isn’t the only game in town. Mexico is actively shopping the most economic sources to supply its regional demand centers—and some of those sources may surprise you.

Cargos of gasoline and diesel have reached both of Mexico’s coasts from places as distant as Europe and the Far East. As I write this, a shipment of product is en route to the west coast from China and Japan—the first such shipment in several years.

That said, the USGC’s close proximity and developed infrastructure make it likely to remain Mexico’s most economic supplier. Currently, American firms supply the country with nearly 1 million bpd of gasoline, ultra-low sulfur diesel and other refined products. However, a combination of high domestic demand and high international supply could invite others to join the party from time to time.

 

Under Water and Across the Line

On October 23, the Trump administration issued a presidential permit that paved the way for the construction of a small section of line that will allow the Valley Crossing Pipeline to cross the U.S.-Mexico border. A subsidiary of Enbridge Inc., the 168-mile pipeline will be capable of delivering 2.6 billion cubic feet of natural gas per day from the Agua Dulce hub near Corpus Christi to the Port of Brownsville. From Brownsville, the pipeline will extend underwater where it will connect with another pipeline to provide electricity through Mexico’s CFE.

The Valley Crossing Pipeline should serve as an excellent interconnect between the surging volumes of gas produced in and around Texas with a burgeoning consumer market in Mexico. And with the pipeline submerged on the ocean floor, the risk of product loss via theft should be mitigated. With the permit now in hand, the expected 2018 in-service date appears reasonable.

 

A Messy Exchange

The past 12 months have been a wild ride for the peso. For most of 2016, the peso to dollar exchange rate varied only slightly, maintaining a range between 17/1 and 19/1. Following the election of Donald Trump last November, however, that rate jumped as high as 22/1. Ironically, this devaluation was partly driven by fears of fuel shortages as Mexico’s energy reforms took effect.

As those reforms settled in, however, consumer confidence increased and pulled the rate back down. But with the Trump administration maintaining a hard line on NAFTA, coupled with uncertainty around the U.S. Fed and lending rates, the peso is back on the hot seat. In October, the FX rate moved nearly 5.5 percent to 19/1.

Concerns about a floating currency rate run deep, and affect stakeholders at every stop on the value chain: those managing operations, raising capital, selling products or assuming credit risk. The peso adds another layer of risk to be understood, addressed and managed appropriately.

Interested in breaking into Mexico’s retail fuels market? With established relationships on both sides of the border, our international markets team is here to answer your questions. Give us a call today.

 

Best,

Chad Smith
Senior Vice President of Terminal Operations