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Mexico launches market-driven fuel prices today

30 Mar 2017, 3.20 pm GMT

Mexico launches market-driven fuel prices today

Mexico City, 30 March (Argus) — Fuel retailers in the northwestern Mexico states of Sonora and Baja California have begun selling gasoline and diesel at market-driven prices today as part of the country's ongoing energy liberalization.

At 12:00am local time today retail fuel prices in those states could vary from the maximum fuel prices that had been set by the finance secretary. The rest of the country will follow suit on a set schedule later this year.

"It is very difficult to anticipate what will happen with prices," said Jose Carlos Femat, director of Onexpo, Mexico's largest association of fuel retailers.

In the now liberalized city of Tijuana, prices which fuel retailers are obligated to provide through a government website showed at 8am local time the average price in Tijuana for premium gasoline was Ps17.66/l ($3.55/USG), compared with a maximum price set by the government yesterday of Ps17.65/l.

Of the 196 stations reporting prices in the city, 190 of them charged the previous day's government-set maximum of 17.65/l. Three were charging the highest price reported, of Ps18.18/l. One station was charging 17.45/l, below the maximum price of the previous day.

Mexico's retail sector is underdeveloped and fragmented, with 80pc of fuel retailers owning from one to three stations, according to data from Onexpo. The country counts less than 12,000 stations nationwide, or one station for every 10,500 inhabitants, four times less than the one per 2,600 inhabitants ratio in the US, according to energy regulator CRE. Before the deregulation process began all stations were franchises of state-run Pemex.

The reform allows the formation of fuel consortiums for the negotiation of lower wholesale gasoline and diesel prices, enabling smaller retailers to better compete against Pemex. Only one has been approved so far by Mexico's competition watchdog Cofece, the G500 group, on 22 March.

Over time, "we are likely to see a change from a highly fragmented market to more associations," Femat told Argus.

Beyond the need to coordinate purchases, prices are likely to vary according to the location of the retail stations, whether they are in a large city amid competitors, isolated on a highway, or near one of Pemex's storage and distribution terminals.

Mexico's energy regulatory commission (CRE) and Cofece said they will monitor prices for any signs of abuse.

Maximum prices will still apply to Pemex until regulators establish that there is enough competition in the liberalized states. According to CRE's rules, Pemex will cease to be dominant in a state when, and if, at least 30pc of all fuel sales come from independent companies and 90pc of the capacity available in Pemex's upcoming open seasons for fuel pipeline and storage infrastructure has been awarded.

Pemex was meant to award storage capacity in a first-ever open season in the states of Baja California and Sonora on 16 March, but a technical error during the auction led officials to abruptly end the event. The CRE, in charge of supervising the process, said a new auction would be scheduled before the end of the month, but the commission told Argus this week that it still did not have a set date.

In February, the finance secretary introduced a fiscal stimulus to the fuel tax, known as the IEPS, to compensate for a 14-20pc price hike in fuel prices that occurred in January. The increase followed the introduction of a new pricing formula, designed to better reflect logistical costs, international reference prices and commercial margins for fuel retail stations.

The fuel market opening is the result of the 2014 energy reform implementation that ended Pemex's long-held downstream and upstream monopolies and established that fuel prices must be liberated by 1 January 2018.

The Mexican government, following the lead of the finance secretary, opted for a region-by-region liberalization of fuel prices, starting in the states of Baja California and Sonora today and ending in the Yucatan Peninsula in November.

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