High oil prices challenge Petrobras and could lead to new readjustments

The sharp rise in the price of a barrel of oil in recent weeks has made a new increase in fuel prices in Brazil more imminent, which are increasingly disconnected from the values ​​practiced internationally.

For sector analysts, the new oil rally tends to sustain the commodity at a high level at least until the end of the year, which could be a challenge to Petrobras’ recent practice of holding prices below those charged by the competition for long periods.

Since May, when it decreed the end of the import parity price policy (PPI), the state-owned company began to contain increases in the amount charged for oil derivatives produced in its refineries.

At the same time as changing the methodology for pricing refined products, the company cut the value of a liter of diesel by 12.8% and that of gasoline by 12.6%. At the time, the Brent barrel, used as an international reference, reached its lowest price since December 2021, trading at around US$72.

Since then, the value of the commodity has soared, against the backdrop of the announcement by Russia and Saudi Arabia to maintain a supply reduction of 1.3 million barrels per day until the end of the year.

Important members of OPEC+, the union of the Organization of Petroleum Exporting Countries with allies, the countries had already been restricting the delivery of cargo since July, a measure initially considered temporary.

Until August, the price of Brent varied between US$82 and US$87, which already represented a difference of up to 20% in relation to the level used as a base when Petrobras reduced the prices of its fuels.

The difference in the value charged by the state-owned company in relation to the costs of importing the fuel made importation less viable, which meant that, in the middle of the month, there were restrictions on the delivery of cargo at some distribution bases for stations, according to entities of the sector.

Amid concerns from analysts and market operators about diesel shortages in the country, Petrobras readjusted, on August 16, the value of diesel and gasoline produced in its refineries by 25.8% and 16.2%, respectively, after three months of avoiding price changes.

With the announcement of the extension of the OPEC+ cartel’s oil supply cut, the value of a barrel of the Brent type rose even further and surpassed US$90 for the first time this year on September 5th. At the highest level since November 2022, futures contracts for the asset were traded in London close to US$92 this Wednesday (13).

As a result, the price gap for petroleum derivatives charged by Petrobras increased. This Wednesday (13), the difference in the amount charged by the state-owned company in relation to the imported product reached 16% in the case of diesel and 11% in the case of gasoline, according to the Brazilian Association of Fuel Importers (Abicom).

The Brazilian Infrastructure Center (CBIE) calculates a 15.86% difference in the price of Petrobras gasoline in relation to the value for the importer and 15.52% in the case of diesel oil.

In a note sent to People’s GazettePetrobras informed that it does not anticipate its price decisions and that “any adjustments are made in the normal course of its business, supported by technical and independent analyses”.

“The commercial strategy adopted by the company since May 2023 started to incorporate its best production and logistics conditions to practice competitive prices compared to the main supply alternatives. We are also able to provide periods of price stability for our customers, avoiding the passing on of the cyclical volatility of the oil and derivatives market to our prices”, says the note.

The state-owned company adds that it observes balance with international and national markets, taking into account its market share, which allows the optimization of its assets, in order to operate them “in a safe and profitable manner”.

Fuel prices have an important impact on inflation indicators

The holding back of increases by the state-owned company directly influences the containment of the country’s inflation, one of the challenges facing the federal government, which is fighting to reduce the interest rate level defined by the Central Bank (BC).

According to the latest edition of the Focus bulletin, released by the BC on Monday (11), the market expectation is for an inflation rate of 4.93% in 2023, compared to a target of 3.25% with a maximum band of up to 4.75%.

The “transport” group has a weight of 20% in the composition of the Broad Consumer Price Index (IPCA), the official indicator of price changes in Brazil. Gasoline alone accounts for 5% of the indicator.

With the adjustment announced in mid-August, fuel increased by 1.24% in the month, according to figures released this Tuesday (12) by the Brazilian Institute of Geography and Statistics (IBGE). Diesel increased by 8.54%.

Supply cuts, European winter and hurricanes in the US could make oil rise even higher

Amance Boutin, a specialist in the fuel market at Argus consultancy, explains that Russia and Saudi Arabia are two of the main oil producers in the world, so the cut in product supply by the countries has a strong impact on product prices globally. “In terms of supply, this is not trivial”, he says.

Furthermore, the oil produced in both countries has a medium to heavy density, which has a good yield for the production of middle distillates, including diesel and aviation kerosene.

“If you look at international prices, you will notice that the reaction of diesel was much greater than that of gasoline, because much of the production of gasoline, mainly in the United States, has been supplied via streams that come from the processing of natural gas” , says Boutin.

Looking at the demand side, in addition to depending more on Russian and Saudi production, diesel, depending on the level of refining and desulfurization, competes with heating oil, which tends to be heavily consumed in the European winter, especially now that countries of the European Union are avoiding the use of Russian natural gas as much as possible.

Starting in December, winter in the Northern Hemisphere will coincide with the end of the deadline for restrictions on oil supply by OPEC+ countries. Whether or not the price of oil remains at a level above US$90 per barrel will depend largely, therefore, on winter temperatures in the Northern Hemisphere, explains the Argus analyst. “It’s anyone’s guess, really. If the temperature drops too much, the price tends to increase [do petróleo]”.

At the same time, global demand for oil is growing with increasing Chinese consumption and use of jet fuel. According to a report released by the International Energy Agency (IEA) this Wednesday (13), world demand is expected to rise by 2.2 million barrels per day this year, to an average of 101.8 million.

Another point of attention, highlights Boutin, is the hurricane season in the United States, which could hit the Gulf of Mexico region, where the North American refining park is concentrated. “Using this weather metaphor, it would be a perfect storm,” he says.

Russian diesel already represents 73.4% of all fuel imports by Brazil

The diesel price situation in Brazil has been alleviated since the beginning of the year with the increase in imports of Russian fuel, driven by discounts offered by producers in Vladimir Putin’s country in the face of a ban on purchases by European Union countries.

From being irrelevant until the end of last year, the Russian derivative reached a record level of 73.4% of all diesel imported into the Brazilian market in August. But, as diesel produced in Russia has also been following the rise in international prices, there is pressure on prices in Brazil anyway.

According to calculations by Argus, the gap between Brazilian diesel and diesel imported from Russia reached 9.8% last Friday (8), while the difference for non-Russian diesel imports was 15.1%.

“As Petrobras cannot supply everything consumed in Brazil, you basically have two diesel markets”, comments Boutin. “The main one is that supplied by Petrobras, from which all distributors will try to extract as much as they can.”

“The rest comes from the secondary market, called marginal barrels, which is what needs to be purchased to complete Petrobras’ offer. This product is more expensive, but coming from Russia there is a smaller delay.”