Houston — Brazilian demand for US Gulf Coast diesel this month -- spurred by a refinery outage and state-run pricing -- has helped drain supplies and push spot differentials past a one-month high.

S&P Global Platts assessed USGC ULSD Thursday at the NYMEX September futures contract minus 4.15 cents/gal, up 50 points day on day and 1.15 cents from August 12. That was the highest differential since May 31, when it was assessed at futures minus 4 cents/gal.

Likewise, the waterborne premium for the Brazilian S10 specification over US Colonial Pipeline fuel reached a one-month high on August 7 at 1.20 cents/gal, steadily trending upward during the previous four weeks. It has since remained at that level.

Brazil sources the vast majority of its diesel imports from the US, with exports to the country averaging 168,000 b/d through May, up from 133,000 b/d in 2018, according to US Energy Information Administration data.

Brazil imported 205,000 b/d of diesel the first five months of the year, down 18,000 b/d from the same period in 2018, according to figures from international data transparency initiative JODI.

Petrobras, Brazil's state-led oil company, recently announced it would shut Refinaria Duque de Caxias, otherwise known as Reduc, for 31 days beginning August 19 to perform maintenance on the 239,000 b/d processing plant.

This outage, combined with domestic prices set by Petrobras that were stronger than the international market, has created an open arbitrage to the country, sources have said.

Platts Import Parity Price for Brazil S10 ULSD in Santos was $80.05/b Thursday, while a delivered cargo was assessed at $77.50/b, compared to $74.31/b on the USGC for Colonial specification.

One source estimated total USGC diesel exports rose 157,000 barrels to 1.37 million barrels for the week ended August 9. That marked an estimated week-on-week change of almost 13%, and an estimated year-on-year change of 55%.

"Brazil has been bringing in combination cargoes of diesel and jet," another source said. "If a [Long Range] fixture is for Brazil, it is probably a combination cargo of some sort, be it diesel and jet, diesel and gasoline, but most likely diesel and jet."

Each LR1 can carry up to 60,000 mt of product. Between August 1 and the 14, around 10 LR1s were placed on subjects to lift cargoes from the Gulf Coast to Brazil. Therefore, enough LR1s have been placed on subjects this month to lift at most 4.47 million barrels of ULSD.

Paper trading for the USGC ULSD swap has ramped up this week and spiked Thursday, with nearly 8 million lots cleared through the CME before the Houston close, mostly for September and October. That compared with nearly 1 million lots on Wednesday. The September swap rose 10 points Thursday to minus 4.30 cents/gal, and the October swap rose 35 points to minus 4.40 cents/gal.

This strong export demand has dented supply along the USGC, where ULSD stocks dropped 2.28 million barrels for the week ended August 9 to 33.06 million barrels, according to EIA data.

Despite that drop in ULSD inventories, net production and refinery utilization fell marginally. Net production fell 4,000 b/d to 2.70 million b/d, while area refinery utilization dropped 0.7 percentage points to 96.7%.

With minimal slowdown in the USGC refinery complex, refiners have had to find outlets to take their large supply.

"The Gulf Coast makes too much ULSD and there is not enough demand in the US, so they have no choice but to export it," one market source said.

--Margaret Rogers, margaret.rogers@spglobal.com

--Elizabeth Brown, elizabeth.brown@sgpglobal.com

--Marieke Alsguth, marieke.alsguth@spglobal.com