Analysis: Pandemic response in Mexico puts gas demand, imports at risk

As the number of reported coronavirus cases in Mexico continues to mount, an uptick in social distancing and work-from-home measures in the country are posing significant downside risk to natural gas demand from both power generators and industrial end-users.

In a Monday morning news conference, Mexican President Andrés Manuel López Obrador said the country's Public Health Ministry would soon announce new measures to confront the virus, reiterating an earlier request that citizens remain in their homes.

As of midday Monday, the number of reported coronavirus cases in Mexico was quickly approaching 1,000, according to the most recent data from the Johns Hopkins Coronavirus Resource Center.

As Mexico's government steps up efforts to quell the spread of COVID-19 infections, reductions in commercial and industrial activity now pose significant risks to gas demand and pipeline imports.

According to S&P Global Platts Analytics, gas consumed by Mexico's power generation sector could decline as much as 7.9% during the pandemic. Industrial demand could simultaneously contract by some 3.3%. Combined, it's possible that total gas demand in Mexico will fall as much as 400 MMcf/d in the weeks ahead, likely prompting a one-to-one reduction in US pipeline exports at the southern border.

DEMAND SCENARIOS

Since Cenace's launch in 2016, average electricity load from Mexico's power sector has averaged about 7.9% lower on weekends, as compared to weekdays, data from the grid operator shows.

Sample demand data collected by Platts Analytics shows a similar effect on gas demand. On Saturdays and Sundays, gas deliveries are on average 5.3% lower for power plants and 3.3% lower for industrial end-users.

Assuming social distancing, travel restrictions and work-from-home measures have a similar weekend-day effect on Mexico's gas consumption, power sector demand could drop by as much as 400 MMcf/d and industrial demand as much as 100 MMcf/d, according to Platts Analytics.

Recent data from Europe, where much of the population has faced near-total lockdown, suggests that those estimates could be conservative. In Italy, industrial gas demand has contracted by some 30%, in France by 18% and in the UK by 17%.

Demand and import data from Mexico suggest that any coronavirus-related demand destruction there would likely drive a commensurate drop in US pipeline exports – mostly from the South Texas market.

LONGER-TERM RISK

Beyond the immediate risk posed by coronavirus, a recent and prior economic slowdown in Mexico could weigh on the country's industrial gas demand this year.

In 2019, Mexico registered a 0.1% contraction in GDP, according to a February 25 report released by the country's National Institute of Statistics and Geography.

For 2020, investment banks Credit Suisse and Barclays are calling for much larger contractions in Mexican GDP, projected at 4% and 2%, respectively.

On March 26, S&P Global Ratings lowered its rating on Mexico's long-term sovereign and local currency, citing a deteriorating investment climate tied to the coronavirus impact on global oil prices. S&P Global Ratings has forecast Mexico's GDP to contract by 2% this year on an annualized basis.