US Gulf coast diesel exports to Brazil shrink

US Gulf coast diesel flows to Brazil are shrinking just as demand is expected to grow there, and a price hike today in Brazil may not be enough to make arbitrage work.

Diesel loadings from the US Gulf coast to Brazil in February thinned to around 66,000 b/d, the lowest level since at least March 2018, according to estimates from data analytics firm Vortexa.

Diesel loadings slowed in February as an extended rally in US Gulf coast prices went unmatched in Brazil's domestic market, where prices have been kept lower by state-owned Petrobras. In addition to the shut arbitrage, a severe winter storm in mid-February caused ongoing disruptions to refinery and port operations along the Gulf coast, limiting both diesel production and exports.

While many refineries are in the process of restarting units shut by the freeze and subsequent natural gas and power curtailments, a narrow export arbitrage could continue to limit exports to Brazil.

US Gulf coast ultra-low sulphur diesel (ULSD) prices rose to $1.88/USG last week, the highest level since January 2020. Prices came off on 26 February and today but remained near 13-month highs.

The US midcontinent will likely pull an increased amount of diesel from the Gulf coast as buyers replenish supplies that have been cut back by the same winter storm that shut down Texas. Diesel arbitrage flows into the midcontinent could continue through the next few weeks as farm users begin to build up inventory for the upcoming planting season.

Meanwhile in Brazil, Petrobras today raised wholesale diesel prices by 5pc, effective tomorrow. Petrobras said the increase will help bring domestic prices to parity with the international markets and exchange rates, but some market participants say the hike is not enough.

With the arbitrage closed in the past six months, importers blame Petrobras for abusing its dominant position in the wholesale market and keeping ex-refinery prices artificially low. The state-controlled company is increasing wholesale prices only gradually, lagging behind international parity prices as global markets tracked stronger oil prices in February.

As a result of the disconnection between Petrobras' refinery gate values and the amounts being paid by loss-making importers, shipments to Brazil have been decreasing, which could cause a supply shortage in the domestic marketplace.

Brazilian diesel imports decreased by 33pc to 790.1mn l (160,475 b/d) in January on the year and were down by 15pc from December levels. Brazil is expected to suspend federal fuel tax on diesel for two months, which could potentially cause demand to spike.

Brazilian president Jair Bolsonaro announced the suspension starting 1 March during a social media broadcast in late February, giving time to find a "permanent" solution for the federal levy. The government still has to release a decree for the suspension to take place. In addition to tax incentives, end user demand is expected to rise over the next two months during the crop harvest season.

An increase in loadings in January meant that around 170,000 b/d of diesel arrived in Brazil from the US Gulf coast in February, the second highest level in six months. But consistent March flows between the Gulf coast and Brazil will depend on a greater leveling of prices between these regions.

By Chunzi Xu and Gabrielle Moreira