Brazil's FCA gasoline arbitrage window closes at main NE ports amid lukewarm demand

The gasoline arbitrage window closed at Brazil's main Northeast ports over the past week amid lukewarm demand and a foggy international scenario, which led to irregular supply and fluctuating prices throughout the month.

Platts, part of S&P Global Commodity Insights, heard Brazilian FCA gasoline negotiations at Suape and Itaqui kicked off March with discounts around Real 10/cu m against Petrobras' reference prices just as the window opened March 6. With a hike on NYMEX RBOB May futures and a now closed window March 31, Platts heard indications of premiums as high as Real 120/cu m against Petrobras' ETM São Luís and Ipojuca levels.

The arbitrage opening was expected to boost Suape and Itaqui's import product negotiations at the beginning of March, but a hectic international political scenario and a tepid domestic demand inhibited such activity.

A further drop in prices by private refiner Acelen March 13 shifted market references to the refiner's product levels. Participants turned to Acelen for remaining monthly quotas, even reportedly canceling purchases of Petrobras' quotas for the month.

The arbitrage window started to tighten mid-month, and with signs of lower import availability, Petrobras sold 19,700 cu m at a premium of Real 5/cu m over its refinery posted prices in a tender. Still, Acelen prices remained as the reference up until March 26, when an unfavorable forex and hiking RBOB futures pushed general market levels back to premiums against Petrobras' references. The window has remained closed since then.

Northeast gasoline market influenced by international levels

Structurally short, the Suape and Itaqui FCA gasoline markets depend partly on imports, making them volatile to NYMEX RBOB futures levels and the US dollar-Brazilian real forex rate. Petrobras' refinery posted prices are used as the reference basis for negotiations, with offers and bids talked as discounts and premiums against the reference. But whenever private refiner Acelen, which dominates the Aratu (Bahia state) market, drops refinery levels below Petrobras', the private refiner's prices tend to dictate negotiation levels.

Overall, the Brazilian gasoline distribution market is controlled by three major distributors: Vibra, Ipiranga and Raízen. According to gasoline sales data published by Brazil's National Petroleum Agency, or ANP, they control almost 60% of gasoline retail sales in Brazil, while the remaining 40% are divided by more than 50 other distributors.

In the Northeast, Vibra and Raízen remain at the top, while Larco is the third biggest participant, according to ANP data. Ipiranga follows in fourth place, and around eight other participants have between 2.5% and 7% of the market each.

Regional market sources report that hydrous ethanol and gasoline sales at the pump, locally known as Otto Cycle, have been sluggish since the start of the year, dampening demand for the product at the Suape and Itaqui spot markets.

Ethanol sales in Northeast Brazil have also increased due to consistently better pricing compared to gasoline over the past two years, shifting the historical preference for gasoline.

Expectations of a higher anhydrous ethanol blending on gasoline this year -- from 27% to 30% -- have also led to market speculations about the fossil fuel's future demand. Brazil's Ministry of Mines and Energy said March 17 that transitioning to E30 from E27 could eliminate the need to import 760 million liters/year of gasoline while boosting domestic biofuel production.

Dynamics at the port of Itaqui might shift in the coming months, as gasoline supply in the Northern port of Belém will likely face restrictions amid decreasing river depths, disrupting distribution of import products.

Petrobras, which distributes quotas in the region, will likely shift product delivery to Vila do Conde (North) and Itaqui, leading to a busier market in both ports, according to sources. This might also increase prices at regional pumps, as distributors will have to add freight costs to run their operations.

Platts launched FCA gasoline A prices (gasoline before blending with ethanol) for Suape and Itaqui on March 31. FCA means free carrier, in which the seller provides the product at their tank, with the buyer responsible for any transportation. The Brazilian FCA gasoline price assessments include imports from abroad, which represent the majority of the spot negotiations, with some domestic refinery quotas.

Platts assessed gasoline FCA Suape at Real 3,027.60/cu m, a Real 110/cu m premium against Petrobras' ETM Ipojuca reference price March 31. Gasoline FCA Itaqui was assessed at Real 3,010.30/cu m, also a Real 110/cu m premium against Petrobras' ETM São Luís reference.