The anatomy of U.S. refined product exports to Mexico

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Last week's edition of This Week In Petroleum focused on domestic drivers of increased U.S. petroleum product exports, including weak U.S. demand and increased production due to higher refinery runs. To better understand international trade flows, factors affecting imports at the recipient's end of the trade must also be taken into account. This week, we look at U.S. product exports from the point of view of the single largest recipient of those exports, Mexico.

The trend in Mexican imports for total petroleum products is a mirror image of that in the United States: at the same time U.S. total product exports have grown, Mexico's gross product imports have also grown. Based on data from the International Energy Agency (IEA), Mexico's product imports increased about two-and-a-half times between 2003 and 2011. Earlier last decade, imports had been trending lower, but the subsequent robust gains have more than offset that contraction.

Gasoline has consistently made up the bulk of Mexican product imports. Gasoline's share of Mexico's total product imports has been trending up in recent years, with gasoline representing about two thirds of total product imports in 2011. Imports of distillate, Mexico's second largest product import, rose almost tenfold from their 2004 level to about 135,000 barrels per day (bbl/d) in 2011. In contrast, fuel switching to natural gas cut into imports of residual fuel oil, which fell from nearly 120,000 bbl/d in 2000 to less than 20,000 bbl/d in 2002. They have since remained relatively steady, slipping further to a low of 10,000 bbl/d in 2010, but inching back up to 25,000 bbl/d in 2011.

Geographic proximity, declining U.S. consumption, and rising Mexican import requirements make Mexico and the United States natural trading partners in refined products. Just as Mexico accounts for the bulk of U.S. product exports, so, too, does the United States top the list of Mexico's suppliers. But rising product flows between the two neighbors are not just a story of serendipitously matching U.S. supply capabilities and Mexico's import requirements: at the margin, the United States also gained market share in Mexico by displacing other suppliers. And while the drivers of Mexican import growth vary product by product, it would be misleading to assume that underlying demand trends fully explain the country's rising import requirements. That was broadly true early on, but more recent Mexican import growth primarily reflects production problems at domestic refineries.

Gasoline, Mexico's largest product import, is a case in point. Between 2003 and 2011, Mexico's imports of U.S. gasoline grew at roughly the same rate, in percentage terms, as its total gasoline imports, about tripling during that period. (Trade statistics from the U.S. Energy Information Administration differ slightly from IEA data, but not enough for the difference to be meaningful. For the sake of consistency, IEA data are used throughout this analysis.) But the growth paths followed by U.S. exports to Mexico and by Mexico's overall imports were far from identical. Between 2003 and 2008, it was Europe, not the United States, that captured most of Mexico's incremental gasoline import requirements. Over that period, European exports expanded their exports to Mexico by 115,000 bbl/d while U.S. exports to Mexico rose by just slightly over 40,000 bbl/d. Through 2007, U.S. refiners had little excess capacity for export markets. Beginning in 2008, things changed; while Mexican imports expanded by a further 75,000 bbl/d between 2008 and 2011, European exports to Mexico swung into decline, contracting by nearly 60,000 bbl/d. At the same time, U.S. exports to Mexico surged by almost 150,000 bb/d, roughly twice Mexico's incremental import volumes as U.S. refiners with surplus capacity found economic opportunities in Mexico. Thus, U.S. exports not only met all of Mexico's incremental imports, but also filled the gap left by diminishing European exports (Figure 1). Meanwhile, Mexican gasoline demand growth slowed from a gain of nearly 190,000 bbl/d between 2003 and 2008 (about one third) to a near halt, IEA assessments indicate. Thus, while Mexico's demand growth between 2003 and 2008 explains import growth almost barrel for barrel, thereafter import growth stems almost entirely from diminishing refinery production, not stronger demand. In 2011, Mexico's output of gasoline fell below gross imports (Figure 2).

The story is slightly different for distillate, though there, too, U.S. export growth did come in part at the expense of other supply sources, albeit more marginal ones. Mexican distillate imports have been on a roller coaster, growing by 55,000 bbl/d (more than 375%) between 2004 and 2007, only to fall back by more than 10,000 bbl/d during the financial crisis of 2008-2009 and later resume with a vengeance, adding nearly 80,000 bbl/d in the last two years. During the first growth stage, U.S. exports to Mexico gained nearly 40,000 bbl/d, but failed to capture Mexico's full import increment, allowing Japan to emerge as Mexico's second largest supplier, with exports of almost 15,000 bbl/d in 2007. The crash of 2008-2009 nearly wiped out Japan's exports to Mexico, though U.S. exports managed to creep up marginally despite overall falling Mexican imports. As Mexican distillate import growth subsequently recovered, not only did U.S. suppliers capture all incremental requirements, but they also displaced additional volumes from Latin America and European member countries of the Organization for Economic Cooperation and Development (OECD), while Japanese exports failed to rebound. Having gone from 100% of total distillate imports in 2001 to 63% in 2004 and 68% in 2007, U.S. shipments to Mexico continued to gain market share, reaching 86% of imports in 2009 and 97% in 2011.

As in many other countries, Mexico's distillate demand has proven more resilient than its gasoline demand. Whereas gasoline consumption reached a plateau after the 2008-2009 financial crisis, distillate demand growth paused only briefly, adding more than 40,000 bbl/d in 2010-2011. Growth over the 2004-2007 period had exceeded 60,000 bbl/d (IEA estimates). Yet while demand growth fully explains increases in distillate imports up until 2009, that is not the case afterwards. Demand for distillates grew faster than imports in 2004-2007 and remained roughly flat in 2008-2009 even as overall imports fell, thanks to rising domestic production at the time. In 2009-2011, in contrast, demand growth accounted for little more than half the rise in imports. As in the case of gasoline, declines in refinery production were a key driver of the rise in imports.

While rising Latin American oil demand has generally supported growth in U.S. oil product exports, recent trade flows between the United States and Mexico show a twist in that pattern. The driving force behind growing U.S. exports to Mexico since 2009 has been less underlying demand growth than shifts in supply patterns, including production problems at local refineries and declining imports from other, more remote sources - Europe for gasoline and Japan for distillate. Absent stronger consumption growth, a rebound in Mexican refining output could back out U.S. product exports. But while a string of recent mishaps at Mexican refineries is unlikely to be repeated soon, neither may strong growth in Mexican refining output be likely in the short term, given strong competition for oil investment from the upstream sector and the priority given to stemming, if not reversing, recent crude production declines. However, just as Mexican demand growth rates show notable product-by-product differences, so, too, is the outlook for U.S. product exports to Mexico likely to vary somewhat product by product. If recent patterns are any guide, U.S. gasoline exports to Mexico, following several years of robust gains, look set to stabilize. In contrast, all things being equal in U.S. domestic refined product markets, more robust underlying Mexican demand growth may continue to support U.S. distillate exports south of the border, even in the event of a recovery in Mexican refinery activity.


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