Mexican refinery blast may help U.S. fuel exporters

NEW YORK Tue Sep 7, 2010 3:38pm EDT

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NEW YORK (Reuters) - The explosion of a hydroprocessing unit at the northern Mexican Cadereyta refinery may bring export opportunities for U.S. refiners along the Gulf Coast and boost U.S. refined products prices, requiring Mexico to import more light fuels such as gasoline or diesel after the blast.

The gasoil hydrotreater unit at Pemex's 275,000 barrel-per-day Cadereyta refinery was rocked by an explosion early Tuesday and has been shut down, Pemex said. There was one death reported and two workers suffering from serious injuries, officials said.

The hydrotreater is an important component of Mexico's most complex refinery, since it removes sulfur to bring fuels such as gasoline or diesel up to government-mandated environmental specifications.

A major problem at the hydrotreater may also affect how much crude is processed by the entire plant, including through its fluid catalytic cracking unit (FCC), although it was not immediately clear whether the refinery would be forced to cut runs or not, traders and industry sources said.

"This should increase Mexico's demand for imports from the United States - one of the key things that will eventually drag down record U.S. oil product stocks is export demand," said Andy Lebow of MF Global in New York.

The Mexican refinery blast comes as total U.S. crude oil and product stocks are at their highest levels since at least 1990, according to data from the Energy Information Administration.

Higher demand from Mexico could help prop up U.S. product prices, including RBOB gasoline futures and heating oil, which turned positive on the refinery news. Any impact to U.S. ultra-low sulfur diesel prices along the Gulf Coast has so far been muted, according to traders there.

U.S. gasoline futures prices are vulnerable to falls during this time of year if inventories remain high, since the U.S. summer driving season has already come to an end.

Mexican gasoline demand was around 800,000 barrels per day in July, according to Pemex, while domestic production was less than 445,000 bpd, prompting Mexico to import around 40 percent of its gasoline. The outage could increase those volumes, traders said.

Mexico bought 432,000 barrels a day of total U.S. refined products in June, making it by far the top importer of U.S.-produced fuels.

"Mexico is already short of refining capacity and this will make it even shorter. It could well raise oil product prices," said Antoine Halff of Newedge Group in New York. "If the refinery is down for a long time it will almost certainly draw oil products, particularly gasoline, from the United States."

Most of the imports were gasoline, but sources said Mexico's diesel imports have been growing fastest.

A U.S. based products trader said the outage in Northeastern Mexico could draw fuel shipments from refiners such as those operated by San Antonio-based Valero, which is already a supplier to Mexico.

Valero said in July it had exported over 60,000 bpd gasoline and over 160,000 bpd distillate to Latin America during the second quarter, helping it to turn a quarterly profit even though U.S. fuel demand has not recovered from a recession.

Mexico's refinery woes may even draw fuel shipments from merchant refiners in regions such as India, one trader estimated.

U.S. crude futures also pared losses after the refinery explosion on Tuesday.

U.S. demand for refined production fell by 2.5 million barrels a day, or nearly 12 percent, between August 2008 and last month, according to EIA figures. But Mexican product demand has been growing, and the country is the top destination for U.S. refinery exports, recently buying more than twice the amount of the next biggest buyer, the Netherlands.

It was not immediately known how long it could take to bring the hydrotreatment unit at Cadereyta back into operation.

(Reporting by Joshua Schneyer and Selam Gebrekidan in New York, Kristen Hays in Houston and Robert Campbell in Mexico City;editing by Sofina Mirza-Reid)

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