The transformation of methane into methanol or higher alcohols at moderate temperature and pressure conditions is of great environmental interest and remains a challenge despite many efforts. Extended surfaces of metallic nickel are inactive for a direct CH4 -> CH3OH conversion. This experimental and computational study provides clear evidence that low Ni loadings on a CeO2(111) support can perform a direct catalytic cycle for the generation of methanol at low temperature using oxygen and water as reactants, with a higher selectivity than ever reported for ceria-based catalysts. On the basis of ambient pressure X-ray photoemission spectroscopy and density functional theory calculations, we demonstrate that water plays a crucial role in blocking catalyst sites where methyl species could fully decompose, an essential factor for diminishing the production of CO and CO2, and in generating sites on which methoxy species and ultimately methanol can form. In addition to water-site blocking, one needs the effects of metal-support interactions to bind and activate methane and water. These findings should be considered when designing metal/oxide catalysts for converting methane to value-added chemicals and fuels.