Mexico's gasoline crunch

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Jeff Mower:

Hello and welcome to the Oil Markets Podcast by S&P Global Commodity Insights, where today we will be discussing the implications of Mexico's regional gasoline shortages.

I am Jeff Mower, director of America's Oil News, and I'm joined today by Sarah Hernandez, Managing Editor of Refined Products Pricing, and Mexico Energy News Editor Sheky Espejo. Welcome.

So Mexico remains highly dependent on gasoline imports from the United States as its refineries are operating below capacity. This will likely continue until Pemex's new Dos Bocas Refinery reaches capacity in 2026. S&P global Commodity insights analysts expect Mexico's 2025 refining throughput to average around 860,000 barrels a day. That's under 60% of capacity and does not include the Dos Bocas refinery.

Now, while state owned oil company Pemex imports the bulk of refined products, private companies have gained significant share estimated at around 20 to 30% of total imports, and that share could rise if recent regional gasoline shortages spur Mexico to expand the participation of private importers. So Sheky, why don't you set the stage for us here? Like, who are the private importers of Mexico and why is their participation limited currently?

Sheky Espejo:

Yes, so the participation of private companies really started a while ago, and right now, as you say, it's a big chunk, but it used to be bigger. So for example, the participation of private importers started around 2017, probably where the first private companies started bringing fuel, both gasoline and diesel, from the US mainly. And that peaked in around 2021 at 205,000 barrels, which was a big, big part of the market. Since the entry or the beginning of the government of President Andrés Manuel López Obrador, there was this push to aid Pemex, so a series of regulatory and other kind of practices from the government reduce the gameplay for private companies, and right now we're around half of that. It's around 113,000 according to Petrol Intelligence Data, is the private local provider of data on these.

And who is the importers? Well that you have very large companies that have become relevant like Oxogas or Petro Seven. Oxogas belongs to FEMSA. It's a big, big conglomerate listed in Mexican and New York stock exchanges, and they have vast operations in Mexico through a convenience store called OXO. And through that brand, they've been able to penetrate the gasoline market and there's is actually the largest holders of permits. They have over 500 permits for the stations. What we'd be seeing is that these are companies, according to their presence in market, they could increase the imports if they were to obtain permits, which is something that could happen in the coming months or weeks some people think, because as you mentioned, there are currently a little bit of shortage.

Jeff Mower:

I'm curious, where are these shortages occurring and why?

Sheky Espejo:

So there have been some reports from local news outlets talking about disruption in supply in the states around Mexico City and the states between the city and the Gulf. So these are the states of Tlaxcala, Puebla, Hidalgo, which is strange because it's the area where the bulk of the fuel is transported, or through which the Pemex pipelines travel to the city. Some people have attributed this to the fact that the government is clamping down on legal or tax evasion in the fuel business. This is something that has been practiced, a common practice in the last, say, four years maybe, and it implies bringing gasoline or diesel and reporting it at customs with a different name or under a different category to avoid paying taxes.

Jeff Mower:

How is most of the smuggled fuel coming in?

Sheky Espejo:

What companies do is they go to the United States, find a trader, by the fuel and have it delivered at the border. And when they cross the product and when they go through customs, they report, let's say diesel as if it were a lubricant, for example, and then they avoid paying taxes. So far, the investigations of the government have found that there were many people involved in this scheme, including people at the customs, the National Guard Pemex itself, and Pemex suppliers and distributors.

So at some point in 2024, according to some estimates, this was about 40% of the market. It was 40% of the fuel that was circulating in the country had entered the country this way. And so for the government, it began to become a problem when obviously they did not see the revenues, the tax revenues that they were expecting. And so the new government of president Claudia Sheinbaum started this very important fight through her defense secretary and the people in their defense security team led by Omar Garcia Harfuch. People think that tackling this situation could produce less fuel coming into the country as a result of people leaving the market.

Jeff Mower:

So the idea being, well now you'd have to increase the permits to bring in imported fuel to make up for those shortages.

Sheky Espejo:

Exactly.

Jeff Mower:

That's the idea. And who's pushing for that? Who's pushing for the increase right now?

Sheky Espejo:

Well, everybody has been pushing for this since they began canceling those permits. So this happened in the previous administration, many people were affected. Even large companies like Vitol or Trafigura lost their permits recently. It was in the news that Valero lost its permit for a while. The government arrived at some Valero facilities, and for some reason they were not able to show their permit or the validity of the permit and their facilities were shut for a few days. But it did cause many people to express concern about the decision of how far the government is willing to go enacting certain regulations in the sake of transparency or as they call it sovereignty, right? In energy.

Jeff Mower:

Are the proponents feeling more emboldened under Sheinbaum? I mean like, under AMLA, of course, as you mentioned, these import permits, there was a real restriction placed on them.

Sheky Espejo:

So based on our conversations with people in the market, what they tell us is that they see a lot more openness from the Sheinbaum government compared to her predecessor. People say they have been having conversations they did not have, or they had not had in six years, seven years with the authority. What people feel is that the team who is surrounding Sheinbaum are a little bit inexperienced in the market. Many of them come from the academia. They used to be researchers, investigators, and so people fear it might take them a little bit to either get to know the market or understand how the market is used to operating.

There are people who have talked about an increased level of corruption among certain mid-level executives from the previous administration, and that has created the new team to reduce or to slow down processes until things are better understood, and until the new team is able to establish new rules and clear rules to more transparency. So people say they're encouraged, they're optimistic. It's still very early to tell, it's been around what? Six months of the new government. But yeah, people are hopeful. And of course a lot of people think that it's not just about expectations. The fact that there are fewer import permits is a risk. The fact that most of the permits are concentrated in Pemex or Pemex distributors, well, it is risk.

Jeff Mower:

So Sarah, from the US side, you're seeing pretty steady export demand, right? I imagine that that will shift, or maybe those export flows will shift once Dos Bocas is fully operational.

Sarah Hernandez:

Well, Dos Bocas is a major breakdown here, but in addition to Dos Bocas, we cannot forget about Dangote. Dangote has been reshuffling all the transatlantic flows, and every time that Dangote starts producing some amount of material, the flows start shifting again. So it's a major disruption. And yeah, even when Dos Bocas has been producing actively some fuel, specifically diesel, and we have been aware that some flows of diesel coming out of there, the main concern on gasoline will be specifically Dangote because we don't really see yet Dos Bocas on a good place to start producing or to start impacting the flows on the near term.

But Dangote is shifting everything. And not only that, the Asian flows in the last years we're affecting too much in the blending operations on the Gulf Coast. Amid all these tariff situations, some flows were re-diverted, some flows were a little bit behind. We saw a reduction of the spot availability on the import side, on the import cargos. In the past, I will say that in the last two years, we used to see more availability of cargos on the spot market ready to be diverted to New York, to the Gulf Coast or even to the West coast depending on where the margins were making more sense. This year, we don't see that much operation on the spot market.

Jeff Mower:

I'm sorry, these are barrels flowing into the US?

Sarah Hernandez:

Not only into the US, but also into the Caribbean market, as Caribbean has been increasing in a significant amount, the blending operations. So we have here a very delicate balance for all the Latin American markets because Caribbean has become a major blending hub, and that is supplying not just good part of Latin America, but also a good part of the Atlantic Coast in the United States. The Caribbean are constantly competing against the blending economics from the Gulf Coast to supply all the Southwest as it is, the Florida, which is one of the markets that are growing the best in the US. And then also Caribbean can supply along the Atlantic Coast, depending if the flows from Europe are economically attractive or not.

Jeff Mower:

How does Dangote impact that? I would think, well, there's more barrels.

Sarah Hernandez:

When Dangote starts producing something, they require less amount of gasoline and NAFTA from Northwest Europe or from the Mediterranean, and then all these flows starts flowing to the Atlantic coast trying to search a home. And if Dangote goes back to zero barrels processed, then those flows get again diverted to supply the west coast of Africa. At this time of year, blending barrels below the, well, actually everywhere but below the Ecuador, it's a very attractive blending economics because the quality of the summer barrels everywhere is the most expensive at this time of the year, so everyone is trying to make their barrels to get the highest value possible. And we see this, for example, on the Gulf Coast where we have a very specific blend stock or very specific component, which is the Unleaded 87. The Unleaded 87 is the main reference for all Latin American importers because it's the product that is more alike to what most of Latin American countries use to import.

This 87 octane, or A.K.I index, it's very representative of what most of the Latin American products consume. In, for example, talking about Mexico, it will be equivalent to the rest of the country regular rate. Then everyone is taking an eye on what this reference is doing on the Gulf Coast to see where the economics are going to work the best. And this is a main indicator to see if they decide to blend on the Caribbean or if they decide to blend in New York, or if they decide definitely to send to West Africa. Recently, the Unleaded 87 has been struggling a little bit after Colonial Pipeline decided to add some logistics restrictions to move those barrels. Unfortunately, the Unleaded 87 and Unleaded 93 products in the United States, this market has been contracting since all the biofuels mandates started. And the market shifted to consume [inaudible 00:13:22] instead of ethanol-free grades. The Unleaded 87 and Unleaded 93 markets started contracting, and this has been a natural consequence.

Jeff Mower:

So explain to our listeners the importance of the Colonial Pipeline.

Sarah Hernandez:

Of course. So in the past, there used to be a bigger amount of Unleaded 87 and 93 grades flowing through the pipeline because this system distributes gasoline and distillates along the east coast. They have the starting point in Pasadena, Houston, and then they deliver products along all the East Coast and run through Linden, New Jersey. Then depending on where the best economics is for the grades, they decide if they are going to leave them on the Gulf Coast or along the Atlantic Coast, or if they are going to take in through the New York.

Specifically talking about the Unleaded 87 grade during summertime, the biggest value or the most attractive value for those barrels relies on the export market. Then it's more common seeing operations with this Unleaded 87 as used it as a blend stock to re-blend all the things that they are going to export or to re-blend some higher quality rates that are going to be distributed in the United States as cargo, for example.

Then the blending operations are maximized during summertime because on the Gulf Coast you can decide if you want to export those barrels, if you want to take them to Florida, if you want to take them to New York, or if you want to definitely send them, for example, to Chicago. Then at this time of the year, when you see that the export market is pulling more barrels, these specific blendstocks, the Unleaded 87 starts becoming more attractive, more relevant because it's going to be a huge indicator to decide where to blend and where to send the barrels.

Going back to the Colonial Pipeline situation, these blendstocks, the volume that they ship has been dropping significantly in the last 10 years, at the point where Colonial decided in December last year that it was no longer profitable to keep, to sustain the Unleaded 87 shipping operations and the Unleaded 93.

So in order to avoid suspending completely shipping these two grades, they decided to allow what they call segregated batches. These segregated batches add logistical restrictions and add logistical challenges that of course are going to impact the price of the product that are moving along the coast. Then if a shipper want to keep the barrels on the Gulf Coast, they will have to pay more for the barrels to make sure that they are going to get them delivered on the terminals where they need them. This discussing that the Unleaded 87 is strengthening compared to other times of the year where the barrels can have more profitability going, for example, to the Northeast.

But at this time of the year, it's very clear that the export market, it's the main place where the barrels should go, and all the geopolitics that have been happening around are promoting or incentivizing the blending on the Gulf Coast, not just for Latin America, but also for the Southeast and also for the West Africa. Depending on the economics of the agronomy, depending on the arts that are coming from the Northeast, and depending on how the flows are looking, the products starts moving to one side or the other. This year, we can notice a trend that is pretty similar in prices. It's pretty similar to what we were seeing back on 2019. 2019, if you guys remember, was the year where we reached at the peak of demand in the US, the peak of gasoline demand. And by that time octane values were very high.

Jeff Mower:

Is that because demand is recovering?

Sarah Hernandez:

I will say that it's because finally the market is reaching a balance where, okay, internal demand is stable and growing up very marginally or decreasing marginally, but it's more or less stable. And exports, they continue growing up. Doesn't matter if they are going to end up being shipped legally or illegally, as Sheky already explained it, but there is a blending demand there. There is a need for material, and all this material is going to be reflected on the market trends.

Then at the end of the day, it's not the illegal market that is going to Mexico is reflected on the market trends of the Gulf Coast, because you cannot pull one bottle from the Gulf Coast without shifting the balance. And at this moment, what we have seen is that all the trends and all the trends in the market show us that the export market is strong, that there is no way that someone can lose some barrels because the barrels out there are very well tracked. And in addition to that, the market is showing that the demand specifically for exports continues growing up strongly. I will invite everyone to continue following all these trends to avoid any surprises.

Jeff Mower:

Yeah, please do. No, thanks so much, Sarah. And thank you Sheky. Thank you both for joining me, and thanks again to our listeners for tuning into this episode of the Platt's Oil Markets Podcast. This oil markets episode was produced by Maite Perez in Mexico City.