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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Latin America Growing More Dependent On U.S. Oil

Oil Rig

Crude production has slowed in parts of Latin America as oil majors struggle to pump for profits. Mexico and other Latin American countries have been relying more heavily on the United States for petroleum imports for several months now, which has led to an interesting trend. For the first time since 1993, the U.S. has a trade surplus in petroleum with Mexico.

The monthly average for this past November had U.S. net exports with Mexico at over 300,000 barrels of oil per day. The average for the fourth week in January was over 2,728,000 barrels per day. The surplus grew substantially in less than three months. This is due to the fact that Mexico is unable to produce as much at these OPEC inflated oil prices.

(Click to enlarge)

On top of this, Mexico has an immense demand for refined petroleum but lacks refinery capacity. As a result, they depend on the U.S. for their crude exports and in turn import back a higher amount of the refined product.

There is a level of uncertainty in the oil market on whether this surplus will truly last. The White House said on January 27th that President Trump is considering taxing Mexico 20 percent on foreign goods to help pay for his planned wall. With the U.S. withdrawing from the Trans-Pacific Partnership there is a need to renegotiate trade deals with eleven countries. Trump is pro energy and wants elevated production levels, but a tariff on trade with our third largest partner would ultimately lead to less business and slower economic growth. To Mexico’s oil producers, it may make financial sense to seek business from other countries. This could prove difficult since the Central American country relies on the U.S. for half its crude consumption. Related: Are We Likely To See A Clash Over Resources In The South China Sea?

Petroleos Mexicanos is the primary oil major of Mexico and is unsure if they should continue doing business in the U.S. The oil major depends on American refineries for demand but might send more oil overseas to Asia. Pemex is state owned but this is an indication that other majors could follow suit if business worsens.

U.S. crude production has been on the rise since July while other international oil exporters have been making an effort to reduce production. The EIA forecasts that U.S. oil production is on track surpass an annual average of 9 million barrels per day this year. As of the January OPEC meeting, members think they’re on course to meet cuts and plan to cut another 550,000 barrels a day. If this trend is to last then there could be a significantly wider variance between oil benchmarks meaning an opportunity for profits in a Brent/WTI spread.

Canada, on the other hand, has oil flowing in the other direction. Imports from Canada have been growing steadily for the past three months and have reached an all-time high of 3.464 million barrels per day. It’s anticipated that business with Canada will increase further once the Keystone XL Pipeline is completed. Under the new administration, it’s probable broad trade with Canada will increase more than trade with Mexico. Such activity is reflected in their respective markets and leads to fluctuations in currency rates. The Canadian Dollar should see a higher value in comparison to the Mexican Peso as trade deals are renegotiated. TransCanada Corporation is the sole owner of the Keystone Pipeline so investors should expect to see returns upon completion.

By Michael McDonald of Oilprice.com

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