The Covid-19 pandemic has made its way to Brazil. What has happened to motor fuel demand in this country? And how will domestic and international imports be affected?
Join Vanessa Viola, Senior Vice President of Latin America and Clayton Melo, Brazil Country Manager as they discuss impacts to the Brazilian motor fuels markets.
Related links:Learn more about our Oil Products coverage
Argus Brazil Motor Fuels report
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Latin America has traditionally been a net importer of gasoline and diesel, but market participants are facing new challenges as the Covid-19 outbreak spreads from Mexico down to Chile.
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Vanessa: Hello and welcome to Driving Discussions, a series of weekly podcasts brought to you by Argus about the major facts impacting the global energy and commodities markets. My name is Vanessa Viola, senior vice-president for Latin America. In today’s episode I talk to Clayton Melo, Argus’ country manager in Brazil, about the impacts of coronavirus in the Brazilian motor fuels market. Welcome Clayton.
Clayton: Thank you for having me here, Vanessa.
Vanessa: Clayton, the measures taken to fight the coronavirus pandemic have severely impacted the demand for oil and oil products around the world. What is the size of the demand drop in the Brazilian motor fuels market?
Clayton: Vanessa, in the first weeks after the mobility restriction measures were implemented the diesel and the so-called otto-cycle (gasoline and ethanol) demands dropped nearly 30 and 70% respectively, depending on the region and fuel distributor.
The data from Brazil’s oil & gas regulator ANP showed that diesel and otto-cycle fuels demand were growing 2.1% and 2.6% respectively year-on-year in the first two months of 2020. By the end of March, although accumulated diesel demand was still growing 2.5%, the otto-cycle demand dropped to -3.0% due to the initial coronavirus impacts.
The later and less significant drop in diesel demand can be explained by the necessity to keep moving and supplying food and other essential products to the population, and especially because of a record grain crop.
Vanessa: And how Petrobras, which refines and supplies most of the domestic motor fuels, has reacted to this significant demand drop?
Clayton: The significant drop in the international prices of crude oil, combined with a strong demand reduction provoked by the coronavirus, have imposed several challenges to Petrobras. They have announced a crude oil production cut of 200,000 barrels a day, nearly 9% of their current production levels, and a 2-billion-dollar reduction in their operational expenses in 2020. Their refineries’ occupancy rate dropped from 71.5% in February to 56% on 19 March as a response to the demand reduction. And Petrobras has also postponed the deadline for potential buyers to present formal offers for the refineries they have put for sale.
Vanessa: How is this volatility affecting clean fuels imports into Brazil?
Clayton: Our editorial team in Sao Paulo and Rio had already perceived a significant reduction of gasoline and diesel import negotiations in the first week of March. By the end of the first half of March more than 1 million cubic meters of diesel were expected to arrive at Brazilian ports, and despite an open arbitrage, importers were avoiding negotiations.
The situation started to change in the second week of April, when we started to see some negotiations among the importers as they sought to close on bargain-priced cargoes amid depressed prices in the US Gulf coast, which eventually resulted in a few transactions reported a couple of weeks ago.
But import activity dropped again during the last week of April as maritime freight prices and demurrage daily rates doubled almost overnight. This was caused by a decrease in tanker availability in Europe and the US as traders used vessels as offshore storage after they filled land storage capacity to the brim.
Vanessa: And what was the impact in the motor fuels prices?
Clayton: Since the beginning of 2020 until last week Petrobras had already reduced their ex-refinery prices somewhere around 48% on average, depending on the fuel and the delivery point. But we should expect further adjustments as crude oil prices have dropped even further since then. During the same period, we saw a 34% reduction in hydrous ethanol prices in the major production and consumption Center-south region. Prices have stabilized above R$1.600/m³ in early April after a month-long drop in prices. But weaker gasoline values and growing ethanol output as sugarcane crushing intensifies could endanger this price recovery.
Vanessa: You mentioned ethanol prices – how do these circumstances have affected the sugar and ethanol industry, so relevant to the domestic gasoline pool supply?
Clayton: The moment the mobility restrictions and consequent demand reduction hit the market could not be worse for the Brazilian ethanol industry, Vanessa. The Center-south region, responsible for more than 90% of the total production, was just starting the harvesting and crushing season – that is a moment where prices usually fall because of excess supply.
Large and financially structured producers, often better equipped with internal storage, can carry their inventory to the second half of the crop season, when realization prices should be higher. But most of the mills don’t have that opportunity.
It is likely that they will try to increase sugar production, which has gained additional incentive with the significant Brazilian Real devaluation against the US dollar.
Some fuel distributors have triggered force majeure clauses to avoid loading unnecessary anhydrous ethanol volumes in ethanol mills, which has prompted a strong reaction from several industry associations.
The industry has also made a few requests to the Federal government to minimally preserve their competitiveness, including the temporary elimination of PIS and COFINS federal taxes, the increase in the gasoline federal tax CIDE, a tax reduction in the decarbonization certificates CBios, and the elimination of any ethanol import duty exemption. But it is not possible to estimate if and when those requests will be accepted and implemented.
Vanessa: Thank you, Clayton. If you want to learn more about the impacts of the coronavirus pandemic in the global commodities markets, access our dedicated microsite at www.argusmedia.com/coronavirus. We will be back soon with another episode of “Driving Discussions”. Bye!