Mexico’s Storage Shortage; Blessing or Curse?By Peter Appleby | Wed, 04/01/2020 - 17:05
The drastic drop in global oil demand, which in part triggered one of the heaviest oil price collapses in recent history, is setting the global oil and gas industry for another challenge. The lack of demand and continued oil production has led to a flooding of the markets that are driving the world’s oil storage perilously close to saturation.
According to Rystad Energy experts, the global-scale demand destruction”caused by the COVID-19 pandemic and price war between Saudi Arabia and Russia will see oil demand decrease by 22MMb/d in April and 2.2 billion barrels over the year. Rystad Energy predicts that without a slowdown in production, the world will hurtle toward maximum crude capacity within 30 days. Once this happens, a further price collapse will take place, it warned.
Meanwhile, storage facilities around the world are seeing business soar. Reuters reported this week that oil tanker rates have doubled as a response to the looming storage shortage, while Argus Media stated the recent booking of 25 very large crude carriers (VLCCs) during February and March, some of which will be moored in the US Gulf of Mexico.
Where does Mexico lie in this storage saga? Yesterday, El Economista reported that PEMEX had assured the country that it has sufficient capacity across its 80 storage terminals to satisfy the country’s demand for the length of this crisis and, having taken precautionary measures with its workforce, is able to continue oil production.
Government data shows that the central region of Mexico alone, including Mexico City, consumed an average of 243.5Mb/d of gasoline and 87Mb/d of diesel during 2019 while data from OPIS/IHS Markit shows that the fuel demand in Mexico has doubled since 1990. Nevertheless, the country’s storage capacity has barely increased.
Mexico’s storage problems were highlighted in January and February 2019 when the federal government closed major pipelines to combat oil theft, generating gasoline shortages throughout the country. The northwest of the country was particularly affected with up to 70 percent of gas stations in Guadalajara without gasoline. PEMEX’s production drop of 4 percent in February to 1.637MMb/d may help slow any storage concerns. But with PEMEX able to store just 3.4 days of national demand as of December 2019, could there be problems with overflow this time around?
The lockdown that most of the country is now under has reduced traffic and the associated fuel demand, a fact that should help keep potential storage concerns at bay for a little longer. According to the Rystad Energy, Mexico City has seen a 40 percent reduction in traffic levels during the last 20 days in comparison to the 2019 average and predicts global road traffic will be reduced by 50 percent in April. Meanwhile, the extraordinarily low gasoline prices the country is seeing could help ease storage concerns further.
Added to this is Mexico’s growing private storage capacity. Writing for the Wilson Institute, Jeremy Martin notes that the CRE has issued 40 permits to private players for the construction of new storage facilities. This should increase the country’s storage capacity by an extra 30MMboe, though the majority of that will go towards storage for imported fuels.
PEMEX plans to monitor its storage situation keenly over the next few weeks. Though the federal government’s increased production goals remain and the NOC has committed to continue production for now, it may do well to consider Rystad Energy’s warning.