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Analysis: Mexico refinery output rebounds as product imports move lower

Houston (Platts)--27 Mar 2017 547 pm EDT/2147 GMT


Refinery production in Mexico is showing some recovery this year after the big drop experienced in 2016, an uptick that might have contributed to lower product imports so far this year.

However, the dent in fuel imports might not be very significant, according to shipbrokers and Platts price data.

Mexico's refinery throughput registered a 1.60% increase to 930,433 b/d in February from January after rising 19.10% to 915,807 b/d that month from December 2016, according to energy ministry data.

"Some maintenance work has been completed [in the refineries] and the non-planned stoppages have been reduced," a source familiar with state-owned Pemex operations said about the increases.

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Significant gains were seen in January in four of Mexico's six refineries: Tula, Salina Cruz, Cadereyta and Salamanca. Tula's output surged 52% from December to 198,777 b/d, Salina Cruz throughput rose 31 % to 252,306 b/d, while Cadereyta registered a 28% increase, to 115,016 b/d, and Salamanca was up 0.76% to 171,884 b/d.

In February, increases from January were seen in three refineries: Minatitlan, with a surge of 34% to 128,582 b/d; Cadereyta, with a gain of 7.32% to 123,433 b/d; and Salamanca, up 0.87% to 173,383 b/d.

The outliers were in Salina Cruz, where output fell 2.4% to 246,245 b/d in February, as well as in Tula, where it decreased 1.71% to 195,381 b/d.

The only refinery that showed production losses in both months was Madero. Its January output fell 4.59% from December and retreated 22.85% in February to 63,409 b/d.

At the same time refineries have registered a general recovery, Mexico's imports of gasoline and diesel, almost all from the US, fell in January and were mixed in February.

Gasoline imports fell 12% to 535,114 b/d in January and retreated 6.80% in February to 498,748 b/d. Diesel imports decreased 14% to 236,340 b/d in January but recovered 11.96% in February to 264,610 b/d, ministry data showed.


2016: YEAR OF RECORDS


In 2016, Mexico's six refineries processed an average of 933,435 b/d, the lowest throughput for a quarter of a century, Pemex data shows. The decline was gradual, falling from 1.08 million b/d in January to 768,910 b/d in December amid planned and unplanned maintenance and repairs at the refineries, which have shown the cracks of years of lack of investment and are not well equipped to process heavier crudes.

To make up for some of the shortfall, Mexico's imports of gasoline and diesel surged. Mexico imported 504,703 b/d of gasoline last year, a new record and up 18.3% from 2015, according to energy ministry data. Diesel imports rose 29.3% from 2015 to 187,846 b/d. Imports of both products accounted for a 67.4% share of Mexico's consumption.


US GASOLINE STILL GOING SOUTH


Despite the recovery of Mexico's refining sector, Platts price data suggests Mexico's pull is still strong enough to lure US gasoline.

RBOB CIF Eastern Mexico cargoes have held a $1.35/b premium to Gulf Coast waterborne so far in March, down from the $1.48/b premium in February. These figures are well above the near parity seen between regions for much of May through September 2016. CIF Mexico RBOB began moving toward a strong premium to Gulf Coast in November, in line with sharply higher imports from the US.

Mexico's pull from the US West Coast has tapered dramatically on perpetually high differentials from Los Angeles to Portland, mostly on maintenance issues. A few cargoes still depart for contractual and other reasons, but cFlow, Platts trade flow software, does not show any cargoes heading south from the USWC to unload in Mexico or any ships heading up empty from Mexico to load products.

Export demand has also caused the spread between California CARB ULSD and EPA diesel to reach parity in six of the last 16 trading days. CARB diesel is used in the state while EPA production -- the same specification as the rest of the country -- can be exported to other states as well as Latin America.


NOT HUGE DECLINES


In addition to Platts data, a shipbroker did not see a huge decline in Mexico's PMI cargoes on the spot clean tanker market. PMI operates internationally as a subsidiary of Pemex, buying and selling crude oil and products.

"You really need to look at what PMI is taking," he said. "They are very active in the market and I doubt that they are taking much less gasoline."

An analyst saw things similarly.

"It seems there are fewer US Gulf Coast-Mexico cargoes, but it is really rather anecdotal, going by the positions," he said. "We had 34 US Gulf Coast-Mexico spot cargoes in January and 27 in February, so it's really not a big drop."

Freight rates for USGC-East Coast Mexico, like all clean tanker rates in the Americas, have spiked over the last week as activity has increased across the board at a time when positions were hard to come by. The USGC-East Coast Mexico route basis 38,000 mt was assessed Monday at a lump sum of $450,000, or $11.84/mt. On March 20, it was sitting at $225,000, or $5.92/mt.

The USGC-Caribbean route was assessed at $775,000, or $20.39/mt. The spread between the two routes was $325,000 and it normally is in the $200,000 range, indicating the demand for cargoes into Mexico are lagging behind the pace in other discharge areas.


RINs AND SLUGGISH ECONOMY WEIGH


Besides the increase in refinery output, imports of gasoline and diesel may have also been impacted by other factors, said David Shields, an independent energy analyst in Mexico City and editor of an energy journal, Energia a Debate.

"Mexico's sluggish economy and higher prices of oil products may also be having a dampening effect on consumption," he said. Shields adds these conditions might curtail higher volumes of imports this year.

Mexico is trying to leave behind its system of government-controlled fuel prices and it is allowing them to adjust gradually to international values as part of its 2013-2014 energy reform to liberalize its energy market. In January it implemented a gasoline price hike of almost 20% that led to protests and gas stations looting after which it adopted a system where prices are set daily.

Another factor that might restrain imports are RINs values, a Latin America refined products trader said. RINs values were set at 7.36 cents/gal Monday after falling to around 5 cents/gal in January and down from as high as 10 cents/gal in December 2016.

Renewal Identification Numbers are not used in Latin American countries, so companies that sell gasoline and diesel to this region can deduct them from the cost. When RINs are down, Latin American countries tend to purchase oil products to take advantage of it.

In the US, price of RINs has come down as the market is expecting news on potential major changes to the Renewable Fuel Standard policy that created RINs as part of a 2007 law to reduce the greenhouse gas emissions and expand the renewable fuels sector.

--Silvia Struthers, silvia.struthers@spglobal.com

--John Delapp, john.delapp@spglobal.com

--James Bambino, james.bambino@spglobal.com

--Matt Kohlman, matt.kohlman@spglobal.com

--Elizabeth Brown, elizabeth.brown@spglobal.com

--Ronald Buchanan, newsdesk@spglobal.com

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

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