Brazil importers started September once again finding discounts of 15-20 cents/gal for Russian versus US-origin diesel after weeks where the spread faded and Russian volumes faltered.
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Brazil buyers were hearing discounts of 6-8 cents by mid-August, not enough to overcome fears of sanctions or difficulties in handling Russian ships. But by then global diesel prices had breached the $100/b price cap on Russian exports, a response to Moscow's invasion of Ukraine in February 2022.
US-origin net-forward assessments for ULSD delivered into Paranagua rose to $135.36/b on Aug. 25, the highest level since Jan. 25, before dipping to $130.41/b on Sept. 1, according to Platts, part of S&P Global Commodity Insights.
On Sept. 1, Platts launched a new all-origin DAP cargo assessment for South Brazil, as well as its differential to NYMEX ULSD futures and its spread to US-origin net-forwards that can capture the elusive Russia discount for diesel in Brazil's increasingly transparent spot market. Platts assessed both spreads at minus 16 cents/gal on Sept. 1.
"It's like parallel markets," one market source said. "There's clean diesel and there's Russian diesel. It's completely crazy. The buyers and sellers change a lot."
He said their forecast before the latest price spike was that US and Russian product would trade close to parity by year's end. "There's a lot of demand for Russian product. Pretty much anybody who can was buying so that discount should narrow," he said. But he added that the spread widened again because "respecting the price cap skews it."
Brazil imported steadily higher volumes of diesel in 2023 from Russia, which found a new home for exports after its European outlet dried up.
Small and then large Brazilian companies began buying up Russian diesel due to its steep discount to diesel originating from the US Gulf Coast -- Brazil's traditional external source of supply. The discount settled around 25-30 cents/gal by spring and about 20 cents/gal for most of the summer.
Shipping data from S&P Global Commodities at Sea showed Brazilian imports of Russian ULSD reached 21 million barrels from January to September 2023, compared with 444,000 barrels for all of 2022. US-origin ULSD imports fell to 18.6 million barrels so far in 2023, versus 36.9 million for the first eight months of 2022.
Brazil imports about 25% of its diesel, and sources confirmed that roughly 80% came from Russia for most of the summer. Brazil has been the second-largest destination behind Turkey for Russian gasoil, loading over 100,000 b/d -- including a record 163,000 b/d in June -- nearly every week until dropping to 45,000 b/d Aug. 18. CAS reported Aug. 28 that the movement rebounded to 102,000 b/d.
Global price cap and local price policy lead to volatility
In May, Brazilian oil giant Petrobras adopted a new pricing policy for domestic diesel and gasoline, abandoning an import parity price policy in place since 2016. The new policy focuses on beating prices for clients' best alternative supplies, company margins and market share, according to Petrobras, which unexpectedly increased domestic postings 25.8% on Aug. 16 to close in on global diesel prices.
S&P Global analysts said Petrobras tried to balance political and financial needs but had to keep up with global prices. "They were going to take a big hit and they were aware of that," analyst Felipe Perez said.
Market sources said Petrobras' move came as diesel breached the Russian price cap, leading to a double dose of volatility, causing trades to whipsaw between 30 cents/gal below NYMEX ULSD futures and 7 cents below.
At the same time the discount was narrowing, the extra handling and blending of Russian diesel was further eating into costs and any advantage was wearing off, sources said. Larger importers also stepped aside as they try to understand sanctions perceptions and legal risks.
"There's a lot of companies ... that are not purchasing above the price cap," said the market source. "So, the Russian trade is really quite down."
S&P Global analysts project the spread may tighten through 2023 and eventually Russian and US diesel imports into Brazil could find themselves at parity.
While Russia has claimed significant market share, sources expect to continue to see strong exports of USGC-refined products into Latin America as it remains more accessible and politically safer for countries to purchase.
"I think there's a risk of the availability of Russian diesel," Perez said, adding that the US could easily fill any void. "With Russia, it all depends on if the refineries can keep running."