Brazilian quarantines, international energy market weakness put brakes on ethanol rally

New York — The recent quarantines enforced throughout Brazil and international energy market weakness have caused a price correction to the recent rally in Center-South ethanol prices.

S&P Global Platts assessed Center-South hydrous ethanol at Real 3,200/cu m on March 18, down Real 395, or 11%, from the most recent high of Real 3,595/cu m on March 5. The Center-South hydrous ethanol price is up 29.3% so far in 2021.

"Many Brazilian states have announced proposed lockdowns due to the potential collapse of healthcare systems in each respective state," said a Sao Paulo-based trader. "The intensive care unit utilization rate is at or above 80% in all but two of Brazil's 27 states."

PODCAST: Brazil's Center-South readies for 2021-22 sugar, ethanol season

Sao Paulo state announced urban driving restrictions to limit the movement of citizens and remained in the purple phase of coronavirus quarantine, the strictest level for the state, on March 19.

The city of Sao Paulo has planned a week-long holiday from March 26 to April 4 to try and reduce the spread of coronavirus.

Under this quarantine phase only essential sectors of the economy will function, such as pharmacies, supermarkets, gas stations and public transportation. Sporting and religious events are prohibited during the purple phase of quarantine.

The anticipated decrease in light-duty vehicle use resulting from the lockdown and the associated drop in ethanol demand has contributed to an 11% correction in ethanol prices. Distributors have limited their ethanol purchases in the spot market until there is further clarity to how near term demand will be affected.

"March hydrous ethanol sales in the Center-South should show a drop between 10%-30% on the month," said a Sao Paulo-based trader. "A better picture of the actual decrease in March sales should be known next week when the sales numbers from this week are consolidated and the weekly ANP report for distributors is published."

Weakness in international energy markets

NYMEX RBOB May futures have decreased around 10% from a recent high price on March 15 and ICE Brent Crude May futures have decreased around 11% since a high price set on March 8.

"There are growing expectations for Petrobras to initiate their first 2021 decrease in the price of ex-refinery gasoline in the near term to stay in line with the import parity price for gasoline," said a Sao Paulo-based trader.

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 hydrous ethanol, 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.

"I am expecting weaker ethanol prices in the Center-South in the near term as international energy markets decrease from 14-month high prices and expectations rise for a Petrobras gasoline price decrease," said a Rio de Janeiro-based trader.

Petrobras utilizes a fuel pricing policy, which include international energy and foreign exchange components to ensure Brazilian domestic prices are in line with international markets.

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.

Petrobras increased ex-refinery gasoline prices by 53% in 2021, which had put massive upward pressure on hydrous ethanol prices in the first few months of 2020 because of an increase in consumer demand for cheaper hydrous ethanol.

BM&F forward curve backwardation lessens

The steep backwardation of the Brazilian Commodities and Futures Exchange's front-month hydrous price has lessened since March 6 because of subsiding fears over an ethanol shortage caused by instituted stricter quarantines throughout Brazil.

Starting in early February the front-month hydrous price had risen in a far greater magnitude than later contract months due to fears over an ethanol supply shortage in the spot market in early April, leading to a steep backwardation of the hydrous futures curve.

The acute demand and supply fundamentals which drove prices to extreme levels have proven temporary because newly announced quarantine restrictions throughout Brazil are expected to quell the demand for hydrous ethanol exceeding supply in the near term.