Petrobras gasoline price boost, dry weather send Center-South ethanol over Real 3,000/ cu m

S&P Global Platts assessed Center-South Brazil hydrous ethanol at a record Real 3,150/cu m on Feb. 18, up Real 300, or 10.5%, on the week. The Center-South hydrous ethanol price is up 27% for 2021.

A Petrobras 9.98% gasoline price hike and dry weather in the Center South have driven ethanol prices to record highs.

"Ethanol prices were expected to continue to increase in the short-term because of persistent dry weather in the Center-South and the possible scenario of an ethanol supply shortage in early April," said a Sao Paulo-based trader. "The announced 9.98% increase in the price of gasoline by Petrobras helped send an already nervous ethanol market into the stratosphere."

Petrobras gasoline price increase

Petrobras announced an average gasoline price increase of 9.98% at refineries Feb. 18. The price increase will be instituted at refineries on Feb. 19.

Petrobras has increased the ex-refinery gasoline price by 34% over a four-week period in 2021, the first of four consecutive price increases occurred at refineries Jan. 19.

The import parity price for imported gasoline is a moving target and any large price movements in the international energy markets or the real/dollar exchange rate will be followed in the near term by an equivalent Petrobras price change for ex-refinery gasoline.

Market participants use Petrobras ex-refinery gasoline price increases as a discounting mechanism for ethanol prices because the gasoline price increase ultimately felt by consumers at the pump will put pressure on hydrous ethanol prices in the near term.

Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or E100. Consumers generally fill their tanks with E100 only when its price is 70% or less than the gasoline price, because of hydrous' lower energy content. Any changes in the ex-refinery price of gasoline can alter this delicate price balance.

Traders saw the hydrous ethanol price ratio to gasoline at about 69 - 70% in the week to Feb. 18. This was slightly below or equal to the threshold level of 70% that encourages consumers to fill their tanks with hydrous ethanol, or E100.

Persistent dry weather in Center-South

Ongoing dry weather in the Center-South has increased expectations for a reduced sugarcane yield for the 2021-2022 crop season and associated drop in ethanol production.

Center-South February rainfall is expected to be 20% below average, 148 mm instead of 183 mm for the month, according to sources.

"Summertime, or December – February in Brazil is important because you have high temperatures and long sun exposure which means that each day without rain means a huge loss of water in the soil," said a Sao Paulo based trader. "It is crucial that rainfall is not just concentrated in one area, but well distributed in the entire Center-South region because it allows the soil to have maximum water retention, which allows the sugarcane to properly develop."

During the peak of summer in a day without rain, a hectare of land loses approximately 600 kg of water, which if persistent over long periods of time can be detrimental to sugarcane development. Although January witnessed sufficient rainfall, December and February have experienced 10%-20% less rainfall in some areas and sugarcane yields are now expected to show a year on year decline for the 2021-2022 crop season.

"The weather forecast for H2 February shows rains not evenly distributed over the Center-South with only three main cane producing states out of six receiving lower precipitations than the historical average," said S&P Global Platts Analytics sugar analyst Claudiu Covrig. "Sao Paulo, Parana and Mato Grosso do Sul are expected to receive very little or no rains up to Feb. 24, while the other three main cane producing states shall receive rains 10%-50% above the norm over the aforementioned period."