Brazil biodiesel cut to lift diesel imports

A reduction of Brazil's biodiesel blending mandate for a forthcoming auction covering market supply in the last two months of the year should support diesel imports into the country.

Earlier this month, Brazil's national energy policy council CNPE trimmed the biofuel blending mandate from 12pc to 10pc (B10) for an October auction targeting market supply in November and December. Each percentage point is equivalent to the volume held by one medium range tanker, considering 4.7bn l (29.6mn bl) of diesel were consumed on average in each of the final two months of 2020, according to data from oil regulator ANP.

The CNPE decision is likely to increase demand for US Gulf coast diesel in the coming months, as supplies in west Africa and the Mideast Gulf remain limited. A preference for short-term deliveries among Brazilian buyers favors diesel originating in the US, which boast shorter turnarounds than product departing from Asia.

Brazil diesel imports rose in August to 1.67bn l, the highest since November 2019, according to data from Brazil's ministry of economy. The expectation is that crop planting and the sugarcane harvest should keep diesel demand elevated in the near-term.

Diesel imports this month are expected to rise to 1.8bn bl, approaching the November 2019 peak, according to oil analytics firm Vortexa.

Fuel oil for thermal power plants

In addition to increased flows of diesel to make up for the lower biofuel mix, the search for fuel oil to meet the needs of the power generation sector is also expanding amid an historic drought that has depleted hydroelectric reservoirs. Diesel and fuel oil are distillates that can be used interchangeably in some power plants.

Fuel oil imports held close to zero for most of the year before jumping to more than 100mn l in August, according to trade ministry data. Market participants expect greater fuel oil demand in the coming months, especially as warmer weather adds further strain to the country's energy supply. According to Vortexa estimates, fuel oil imports should total around 85mn l in September, with almost all inflows destined for the northeastern ports of Itaqui in Maranhao and Suape in Pernambuco.

Thermal plants are being activated with increased frequency as the drought reduces thermoelectric power generation. In late August, Petrobras reported that fuel oil offerings for thermoelectric customers started in June, with the largest volume of product available for sale coming from operational optimizations at refineries and imports.

About 70pc of hydroelectric generation in Brazil is concentrated in the southeast and center-west regions where reservoir levels are at lows not seen in decades. Discussing the issue with Brazil's lower congressional house earlier this week, Petrobras chief executive Joaquim Silva e Luna said the energy crisis should extend at least into November.

By Gabrielle Moreira