On the 3rd of December PEMEX opened its first gas station in the US, choosing Houston as its base location for living out the American dream. The gas station is selling petrol from the US at the second lowest price in all of Houston, an advantage it will need to compete with the seven other gas stations located less than six blocks away. According to gasbuddy.com, the price per gallon of regular gas stood at US$1.54 at the 3rd of December. This is also approximately 49.8% less expensive than the petrol sold in Mexico.

 

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PEMEX’s First US-Based Gas Station. Source: Houston Chronicle

The PEMEX gas stations are being opened by a US gas group that acquired the franchise. It plans to open four more stations in Houston by the end of this year. In addition to owning the gas stations, the franchisee will also be in charge of buying fuel in the US and determining the retail price.

This plan is part of a strategy for PEMEX to expand beyond the Mexican border. The pilot phase will last six months, and will be used to measure the brand’s performance based on that of others, in addition to identifying opportunities that could serve to potentially enter further foreign markets. Houston was selected as the project base for two main reasons. Not only does it enjoy a large Latino community, which includes many Mexicans, it is also highly competent in the gas station market. PEMEX believes it is an ideal location to test the penetration of the brand abroad. In addition to serving as an experiment, the project will also allow PEMEX to prepare for the entrance of international players to the Mexican petrol market, expected to open in 2018, as its Houston competition is likely to mirror its future Mexican competitors.

This will confer the parastatal much needed skills, given the situation of Mexico’s oil and gas market, and particularly, given the state of affairs at PEMEX. The national oil company started the second week of December 2015 with a sharp drop of 6.71% in the price of its export mix compared to the previous Friday, while the main benchmarks in the industry only suffered drops inferior to 1%. The Mexican mix finished the week at US$29.91, a level not seen since December 2008. The continuing decline in oil prices translates into lower income for Mexico, a loss so far estimated at 38% by the Finance Ministry, if compared to the same period last year. Sadly, the drop has no end in sight.

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WTI Prices Over the Past 5 Years. Source: Bloomberg

An Endless Spiral

Demand has no motive to rise, with the global economy decelerating, and supply certainly has no intention of slowing down any time soon, as confirmed by OPEC’s latest meeting on Friday 11 December in Vienna.

Market experts termed the meeting “disappointing”, as the members were expected to come to a decision concerning the current situation of global oversupply, and announce a new and becoming production strategy. None of these objectives were reached. Oversupply will continue, with production levels currently 1.5million b/d over the previously established ceiling of 30million b/d. And understandably, why should OPEC reduce its production while other producers continue pumping oil with no limit, the member countries argue? Certain market experts maintain that OPEC cannot be counted on to regulate the oil price, as it accounts for less than half of total global production. The organization will carry on with its current strategy, preferring market share over prices, and has agreed to meet again in June 2016 to decide on a new production strategy. Unless shale producers have stepped their game down a notch by then, the outcome risks being the same.

Is there a way out of this bottomless downward spiral? Perhaps, but this is just speculation. OPEC’s strategy was oversupply the market with oil so the prices would respond consequentially, and drop. In turn, this should have left shale operators, responsible for the sudden production boom, without the necessary resources to produce their expensive oil, giving them no choice but to exit the market. Supply would then return to “normal”, and the industry with it. This, however, did not work for two main reasons. Firstly, and for the past year, US shale firms have remained afloat thanks to hedges that protected them from any losses, without forgetting Wall Street’s injection of capital in the first semester. Lastly, shale producers have survived the current low oil prices by cutting costs and developing technologies that increased the production levels of wells. Nevertheless, experts believe that opportunities to improve productivity are vanishing, while access to capital markets is closing, and most of the oil hedges expire at the end of this year. These factors have led certain analysts to predict a 10% drop in total US oil production for 2016.

With Iran expected to add capacity to the global oil market next year, it would not be bad news for Mexico and PEMEX if this prediction were to become reality.

 

Source: Reforma Newspaper, The Wall Street Journal Americas

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