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Brazil plans to buy 'cheap' diesel from Russia amid price concerns: Bolsonaro

Highlights

Sanctions yield steep price discounts

Also needs fertilizers from Russia

Follows CEO change at Petrobras

Brazilian President Jair Bolsonaro indicated the country is close to buying cheap diesel cargoes from Russia amid concerns over high prices and short supplies.

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"A deal to buy much-cheaper diesel from Russia is almost ready," Bolsonaro told supporters July 11. Attempts to buy Russian refined products would follow similar efforts to secure fertilizers made during a presidential visit before Russia invaded Ukraine, said Bolsonaro, who is running for reelection in October.

Bolsonaro's public backing of Russian imports came amid growing concerns about potential supply shortages in the second half of 2022 when the country's sugarcane and oil seed harvests will be peaking. Brazil's massive agriculture sector drives demand for diesel, making it the country's top refined product in terms of demand.

But diesel prices skyrocketed after Russia invaded Ukraine and the global economy started to recover, causing a series of price increases as state-led Petrobras maintained domestic prices at parity with international imports. Import-parity pricing is required as part of a 2019 antitrust agreement, but industry officials also say it's needed to keep windows open for third-party importers.

Petrobras has warned the government that Brazil could face potential supply shortages in the second half of 2022 if the import-parity pricing policy wasn't maintained, but Bolsonaro wants the policy scrapped and has installed two CEOs at Petrobras this year in an effort to end its use.

Brazil needs to import at least 25% of its consumption to make up for a domestic refining shortfall, especially for ULSD. The US Gulf of Mexico has typically been the origin for most of Brazil's ULSD needs, but traders have typically sought alternatives during the peak harvest season in case of hurricane-related supply disruptions.

And a deal with Russia could put a damper on pricier US diesel shipments to Brazil. The US has supplied between 54% and 71% of Brazil's diesel imports in the last three months, according to Platts Analytics. Other notable diesel suppliers to Brazil have included Saudi Arabia, India, and the UAE.

The US' overall diesel exports rose to 1.43 million b/d in April, which is the most recent month updated by the US Energy Information Administration, from 1.23 million b/d in March. April volumes are the highest since August 2019.

And, after Mexico, Brazil is easily the largest recipient of US diesel or distillate fuel oil.

Brazil received 214,000 b/d in April, up from 169,000 b/d in March, according to the EIA. The April barrels were the most shipped to Brazil since July.

Latin America received its highest imported volumes of diesel from the former Soviet Union nations, including Russia, in 2021 at 71,000 b/d, but those barrels made up only 5% of the 1.33 million b/d of diesel imports, according to Platts Analytics. Before the Russian invasion of Ukraine, FSU imports to Latin America had been forecast to double in the ensuing years.

Pricing woes

Diesel cargoes of "open origin" have been trading at around $100/mt discounts to non-Russian diesel in the European market, with the open origin cargoes widely understood to be of Russian origin because of the historical prevalence of Primorsk exports in the Northwest European market, according to European traders. Platts assessed the spread between CIF Northwest European cargoes of open origin and non-Russian origin at $108/mt July 11.

Market participants in the European market frequently cited Latin America as a potential destination for Russian diesel exports as the European market increasingly self-sanctions the trade of Russian barrels, ahead of formal sanctions from the European Commission, set to come into place in February 2023.

Mines and Energy Minister Adolfo Sachsida told a Senate committee July 12 that Brazil currently had about 50 days worth of diesel on hand at distributors and terminals.

"If something happens in the world and we can't import oil, Brazil has 50 days' worth of diesel without the need to import any more oil," Sachsida said.

Brazil's National Petroleum Agency and the government's Energy Research Co. were constantly monitoring fuel supplies, Sachsida said.

The current supply also tops a new requirement to hold a 45-day supply that the ANP proposed July 1. The proposal would require diesel producers and fuel distributors that hold at least an 8% share of Brazil's market to hold at least 1.65 million cu m of ULSD from Sept. 1, 2022, until Nov. 30, 2022. That would be enough to cover Brazil's diesel deficit for about 45 days in case of disruptions to global import flows, according to the ANP.

Bolsonaro, however, faces a tough reelection fight and currently trails former president Luiz Inacio Lula da Silva in many early polls. That would make Russian diesel attractive.

One Latin American trading source said Brazil will look at the option, as would other countries. "The government in some places are subsidizing some of the cost and they cannot afford that. Think Peru and Ecuador," he said. "The crude was going at a big discount. I think Trafigura sold some Urals at Brent minus $36/b and it would ordinarily be like minus $5."

The discount, however, will have to be big enough to overcome political pressure from the West, as well as other financial barriers set up in the wake of the invasion. That makes sense for few Latin American countries outside of Russian-aligned ones such as Cuba, Nicaragua, and Venezuela, a second source said.

"It must be a big discount," he said. "Not many people want to touch Russian material."

"Another problem is the payment," the second source continued. "How do you pay if all the normal banks cannot do transactions with Russian companies?"