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Feature: Mexico pivots to Asia for gasoline during US summer driving season

Houston — Mexican imports of gasoline from China in June spiked to a new monthly high in June, while imports from the US, Mexico's most important gasoline supplier, declined in the same month.

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In Asia, market sources attributed this trend to a glut of gasoline on their side of the Pacific, while those in the US said it was caused by strong demand here, which limited the barrels available for export markets.

While the US refining complex was running near its upper limit in June, Mexico imported gasoline out of eastern Asia at unprecedented levels.

"The Gulf was too expensive," while Asia offered "better prices" for gasoline in June, one US Gulf Coast gasoline broker said.

Data from Mexico's Energy Secretariat, or SENER, shows Mexico imported 896,000 barrels of gasoline from China in June, which beat the high set in May. During June and May of 2017, China sent no gasoline to Mexico and prior to 2018, the flow of China gasoline directly to Mexico was quite sparse. In 2017, China loaded a 34,964 mt cargo in December to Mexico, Chinese General Administration of Customs data shows.

Increased energy trade between China and Mexico can also be observed in data from cFlow, Platts trade flow software, which shows that clean ship traffic from China to Mexico totaled 150,897 DwT in June, up from 102,650 DwT during the year-ago month.

In addition to China, other Asian nations have also made their presences felt in the Mexican fuel market this summer, SENER data shows. In June, Malaysia sent 301,000 barrels of gasoline to Mexico, after sending none in June 2017. Singapore sent 302,000 barrels to Mexico in June, a touch above the 299,000 barrels sent in June 2017. South Korea sent 65,000 barrels in June after none in the year-ago month.

SENER data shows this all occurred amid a reduction in imports from the US, perennially Mexico's top gasoline supplier. In June, state Pemex imported 12.385 million barrels of gasoline from the US, down 2.317 million barrels from May and down 1.357 million barrels from the year-ago month. EIA data showing US June gasoline exports to specific countries has not yet been published.

In Asia, market sources have said that brimming stocks of gasoline there have left suppliers looking further afield this summer for profitable markets.

"In Asia, the market is very bad now -- there are barrels coming out from every refinery," a Northeast Asian refiner said.

RECORD US DEMAND STRAINS EXPORT CAPACITY

While a supply glut in Asia has encouraged gasoline flows into Mexico, on the other side of the Rio Grande River, in the US, strong demand has limited the amount of barrels available for export.

"US production first satisfies domestic demand then looks for next best export outlet," a USGC gasoline trader said. "So with relatively fewer [US] barrels left for export, the shortfall has to be covered from somewhere."

Without question, this summer has been a watermark season for US gasoline consumption. In the week ended June 8, product supplied, a gasoline demand proxy, hit 9.879 million b/d, setting a new high, according to Energy Information Administration data going as far back as 1991. Later, in the week ended June 29, that level was reported at 9.869 million b/d, its second-highest reported level.

In the context of this roaring demand, the US refining complex ran at close to maximum rates in June. In the weeks ended June 22 and June 29, US refineries ran at 97.5% and 97.1%, respectively, of total capacity. This was the first time the US refining complex ran above 97% of total capacity for two consecutive weeks since June 2001, the data showed.

The same data shows that Gulf Coast refineries, which make up more than half of US capacity, ran above 97% from the week ended June 15 through the week ended June 29, the first three consecutive weeks that has happened in the region in data going as far back as 2010. With the US refining complex preoccupied with meeting domestic demand, exports of gasoline averaged just 487,000 b/d in the week ended June 29, the least in June since the week ended June 24, 2016. EIA data also shows that the four-week moving average for US gasoline exports was 578,000 b/d in the period ended June 29, about 9.5% below the year-ago timeframe.

WEAK PEMEX OUTPUT STOKES IMPORT NEEDS Mexico's thirst for fuel imports can no doubt be traced back to its lackluster domestic production throughout this year.

According to the most recent output data from SENER, Pemex's six Mexican refineries, with a total capacity of 1.6 million b/d, produced only a combined 245,551 b/d of gasoline in May, the least for any May at least as far back as 1990. Production data for June has not yet been published. But it seems probable that output in the month was also below typical levels given that SENER data shows Mexican gasoline stocks then were below levels seen in 2016 and 2017. With production in Mexico below historic norms, data from cFlow shows Mexico's Pacific Coast continues to draw in clean tankers from East Asia. The 46,176 DwT Grand Ace 6 is on its way to Lazaro Cardenas from Malaysia while the 49,999 DwT Nave Sextans is bound there from Singapore.

S&P Global Platts shipping data shows that some clean tanker Asia routes remain competitive with the USGC in reaching Mexico's Pacific Coast. In July, PMI chartered the Medium Range Astir Lady from Guangzhou, China, to the coast at a rate of $1.05 million. Also in July, PMI chartered the Torm Agnete to carry 38,000 mt from the US Gulf Coast to Mexico's Pacific Coast at the same rate of $1.05 million, according to shipping sources.

These shipping market dynamics seem to line up with the views of sources in the US and Asia, who see potential for more Asian gasoline to reach Mexico in the months to come, given expectations of refinery turnarounds for later this year.

On Friday, Pemex said it has begun the process of a major revamping at its 315,000 b/d Tula refinery, followed by maintenance at its 220,000 b/d Salamanca refinery and its 330,000 b/d Salina Cruz refinery, the largest in Mexico. Pemex did not give a schedule or timeline for these repairs.

Sources in Mexico, however, have said they are skeptical of a recent announcement by Mexico's future energy secretary, Rocio Nahle, that the incoming administration of President-elect Andres Manuel Lopez Obrador hopes to spend $2 billion in 2019 to rehabilitate all six Pemex refineries. Nahle said the work will take six to seven months and will be carried out simultaneously across all the company's refineries starting in December.

While carrying out maintenance across all of Pemex's refineries at the same time in 2019 is an ambitious goal, "a total shutdown is improbable," said Gonzalo Monroy, managing director of Mexico City-based energy consulting firm GMEC. "To repair all the refineries would require a master refining plan that I believe not even Pemex has."

However they play out, these turnarounds seem poised to open the door to Mexico's fuel market for more Asian cargoes, sources said.

"We expect Mexico and other Central America nations to be serviced from Asia going forward" a US trader said. "Long term, Asia is glutted and is building out capacity so it's poised to be an exporter of gasoline for a while, hitting short markets in Latin America and even the US, especially the West Coast."

--Staff, newsdesk@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com