Brazilian hydrous ethanol sets multi-year low on falling offers, gasoline

New York — The hydrous ethanol price in Brazil's key Center-South fell to a more than two-year low Friday on steep seller discounts and falling gasoline prices.

Hydrous ethanol decreased to Real 1,700/cu m ex-mill Ribeirao Preto, its lowest level since July 20, 2017, when Platts assessed hydrous ethanol at Real 1,660/cu m ex-mill Ribeirao Preto.

This low for the year was in stark contrast to the most recent high of Real 2,590/cu m ex-mill Ribeirao Preto on February 27. Hydrous ethanol in the Center-South has plunged over 34% or 890 Real/cu m ex-mill Ribeirao Preto in less than one month.

A prominent seller has remained a dominant market force over the past two weeks with aggressive offers driving down prices multiple times each week.

Market participants were expecting larger producers to continue aggressively selling ethanol to balance their ethanol stocks to cash on hand when closing out the crop year ending March 31.

"I am expecting a near-term bottom in ethanol prices in the Center-South as larger producers will finish the crop year on March 31," a Sao Paulo-based trader said. "Afterwards these large producers will switch focus to maximizing their long-term profits during the next crop rather than the short-term balancing of their ethanol stocks to cash on hand."

GASOLINE AND INTERNATIONAL ENERGY FACTORS

Ethanol was also weighed down by falling gasoline prices at refineries in Brazil. Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or 100% hydrous ethanol (E100). Consumers generally fill their tanks with E100 only when its price is 70% or less than that of gasoline, due to hydrous ethanol's lower energy content.

Petrobras announced a gasoline price decrease of 5% Friday, which will be instituted at refineries Saturday. This decrease in gasoline price at refineries was the second for this week.

The state-owned oil company has cut gasoline prices at refineries by a cumulative 43% for the year, which has pressured hydrous ethanol prices amid an increase in consumer demand for gasoline.

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

Although a few market participants expect ethanol prices to bottom out soon, the next few months will show if the coronavirus destroys enough fuel demand in Brazil for hydrous ethanol stocks to build and prices to continue their fall.

An additional factor will be whether international energy markets continue to decline, thus spurring Petrobras to continue cutting the gasoline price at refineries. Further gasoline price cuts at refineries, combined with a decrease in hydrous ethanol demand, are expected to result in much lower ethanol prices in the near term.

Compared with the 34% price decrease in Center-South hydrous ethanol, the NYMEX RBOB May futures contract has declined over 70% and ICE Brent Crude May has slumped over 64% from the highs set earlier in the year on January 8.