Mexico sending record high fuel oil to the US as refinery runs rise

US imports of fuel oil from Mexico have increased in the first half of 2022, with strong coker demand in the US soaking up a surplus across the border, replacing barrels from Russia, an analysis of US Customs data showed July 22.

The US has imported 31.68 million barrels of fuel oil from Mexico in the first half of 2022, averaging 5.28 million barrels a month, and exceeding first half 2021 imports by 11 million barrels.

"Five million barrels a month? That's insane," said one Latin America fuel oil trader.

The US is on track to import far more residual fuel oil from Mexico by year-end than it did throughout 2021, when imports hit a record high 47.26 million barrels. And that was up from 34.22 million barrels in 2019.

The US imported 4.2 million barrels of fuel oil from Mexico in the first 18 days of July, Customs data shows.

The bulk of US fuel oil imports flows to the US Gulf Coast, home of nearly nearly half of total US refinery capacity. These fuel oil feedstocks are crucial for processing in the secondary units of complex refineries. Smaller volumes flow to the east and west coasts.

The boost in imports from Mexico in 2020 and 2021 was initially driven by the need for cleaner marine fuel standards under the IMO 2020 shift, which resulted in more fuel oil being upgraded into low sulfur fuels.

Also, US refinery runs have increased as demand has recovered following the coronavirus pandemic. USGC refiners were operating at 98% of capacity the week ending July 15, up from 81.2% at the end of 2020, US Energy Information Administration data shows.

Also, after the US implemented sanctions against Russian oil in March in response to Russia's invasion of Ukraine, USGC refiners had to look to alternative sources for HSFO.

The US imported 54.2 million barrels from Russia in 2021, and a record 79.3 million barrels in 2020, Customs data showed.

Mexico became an obvious choice due to its production and close proximity to Texas and Louisiana refineries.

One US-based trader said Mexico has limited buyers for its HSFO, making the USGC an easy outlet.

"My natural question would be [apart from] Saudi utility demand, where else could it go?" the trader said. "After the war, I'm sure it was a function of replacing M100."

"We are running more domestic crudes, which don't have much bottoms," a second US trader said, referring to what's traditionally known as bottom of the barrel product. Mexican refiners, however, are running mainly on their own heavy crudes that produce more residual fuel. While Mexico does use some of this HSFO for power generation, Mexico regulations stipulate that higher sulfur fuel oils can only be run in rural areas, limiting its use.

"They have to buy lower sulfur fuel, but they make lots of HSFO," he said.

Competitive barrels

Sources expect the imports to continue, although the pace may slow down.

"There's always the competition for the US market for Russia, Canada and Mexico, and Russia's out of the picture, so you should have seen more of those [residual fuel oils] coming from Mexico," said Felipe Perez, Latin America downstream strategist for S&P Global Commodity Insights. "Mexico's refinery system has sustained high levels of crude runs, although it has slowed down seasonally a bit and cooled off. But it's high still."

"Mexico might have met the first wave in terms of volume, but it might now be coming from somewhere else," he said.

US fuel oil imports from Canada surpassed 1 million barrels in June, the highest monthly total thus far in 2022, Customs data shows. The UAE has shipped 3.05 million barrels to the US since April, including 1.13 million barrels in July alone. Saudi Arabia has shipped 2.68 million barrels to the US in 2022, more than the previous six years combined.

The US has also imported fuel oil this year from Iraq, Ecuador, Turkey, Brazil and the Bahamas.

Mexico and almost all of Latin America are heavily dependent on imports of refined products, especially from the USGC. EIA data showed 48% of the 2 billion barrels of US refined product exports in 2021 were sent to Latin America, mostly diesel and gasoline, with Brazil a distant second to Mexico as primary destinations.