Brazilian oil production achieved a record high in May, boosting supply available for export to China, which has emerged as an important outlet for Brazilian crude.
Brazilian oil output rose to 2.73mn b/d in May, after hovering around 2.6mn b/d since December 2017, data from Brazil’s oil regulator ANP show. The increase was made possible by new well connections at the Buzios and Lula pre-salt fields, which will support even larger output growth in the second half of this year, Brazil’s state-controlled Petrobras says. The firm expects Brazilian production to grow by 13pc this year, from 2.01mn b/d in 2018.
This rising output continues to find a key export market in China, where record volumes of Lula have traded on the country’s spot market for delivery next month. Lula is a medium sweet crude, rich in middle distillates and offering a high diesel yield. And diesel margins are strong in China, boosting the country’s appetite for medium sweet crude.
More and more of Brazil’s production — particularly Lula — is heading to China’s Shandong province, where refineries are configured to produce higher proportions of diesel. Argus’ delivered ex-ship (des) Shandong assessments provide the only transparent market price for Lula. China takes two-thirds of Brazil’s crude exports — or 850,000 b/d in January-May — and some 420,000 b/d of Lula and Petrobras’ lookalike Buzios grade has traded for delivery to Shandong in August. Shandong’s previous record Lula intake was 390,000 b/d in March. Another 200,000 b/d has already traded for delivery in September.
Lula premiums to Ice November Brent have fallen to $3.40/bl for August-delivery cargoes, from $4.55/bl for July receipts, as most Lula cargoes have now sold, prompting Shandong refiners to look for alternative grades such as Russian ESPO Blend.
The Petrobras-operated Lula field remained Brazil’s biggest producer in May producing around 910,000 b/d, up by 4pc from April. Lula, in Brazil’s offshore Santos basin, now accounts for a third of oil produced in Brazil. Crude production from the pre-salt offshore fields accounts for almost 61pc of Brazil’s total production, a figure that is expected to grow as upstream investment shifts from the country’s ageing post-salt fields in favor of big pre-salt reservoirs.