Market Currents: Mexico’s gasoline dilemma

Amid a better-than-expected U.S. GDP print and a slightly softer dollar, oil prices are on the rise today. Gasoline, however, is on the move lower – and something we hone in on for today’s blog. Hark, here are five things to consider in oil (and gasoline!) markets today:

1) Mexico is looking to remove price subsidies on gasoline next March, as the country continues to liberalize its energy market. Pemex controls all upstream and downstream oil activities, and has done for over 75 years, but as Mexico looks to pivot away from a state monopoly to create a more competitive environment, the removal of subsidies could see retail prices jump 15 percent or more.

As Mexico’s refineries have become ever more decrepit amid a lack of investment, reliance on gasoline imports has continued to grow. As our ClipperData illustrate below, U.S. gasoline export loadings to Mexico have averaged over 370,000 barrels per day so far this year, up over 25 percent on year-ago levels:

 

gasoline exports to Mexico ClipperData.jpg

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2) Mexican gasoline price liberalization is to be rolled out gradually in five stages (red = Mar 30, orange = Jun 15, yellow = Oct 30, green = Nov 30, blue = Dec 30).

Mexico has 11,400 gas stations, with about a third of them concentrated in the six largest states. The gas station penetration rate is 9 stations per 100,000 people – compared to 36 per 100,000 in the United States.

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3) While on the topic of gasoline, retail gasoline prices are up to $2.26/gal on the national average – the highest since early October. As the OPEC production cut-sponsored crude rally works its way into the gasoline price, we are seeing prices rise into the end of the year, when we traditionally see them dipping towards their their lowest ebb.

retail gasoline Dec 2016.jpg

4) Crude oil as an input for gasoline accounts for some 50 percent of the price (the rest is 21 percent for taxes, 19 percent for distribution and marketing, and 12 percent for refining). Hence, gasoline prices are rising due to higher crude prices, even though demand is 3 percent lower than last year (using gasoline product supplied on the 4-week moving average as a proxy for demand). Meanwhile, inventories also remain elevated versus both last year and the five-year range:

gasoline stocks dec 2016.jpg

5) Finally, EIA’s ‘This Week in Petroleum‘ addresses the Department of Energy’s decision to start selling crude from the strategic petroleum reserve (SPR), starting as soon as next month. Nearly 190 million barrels of the ~695 million barrel reserve is to be sold from 2017 to 2025.

There are several different tranches of sales which have been approved by Congress, as highlighted below. As a member of the IEA, the U.S. is obligated to maintain inventories to cover at least 90 days of net imports. This number is currently closer to 140 days.

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