Brazil expects to add to LNG competition over winter: sources

Low hydro reservoirs because of recent heat waves in Brazil has sparked strong buying interest for waterborne LNG cargoes, with traders expecting the country to heighten the global race for the super-chilled fuel over winter.

Recent heat waves across Latin America have pushed buyers in the region to procure LNG volumes on the spot market to help satiate domestic power generation needs, sources said.

Brazil has already imported 280,000 metric tons, or four cargoes, of LNG as of Sept. 25, which puts current imports at the strongest levels seen since January 2022, according to S&P Global Commodity Insights data. This compares with 210,000 t seen for August and 70,000 t seen in September 2023, the data showed.

Brazil is also expected to receive another 70,000 t cargo Sept. 26, which would push total imports past multi-year highs, Commodity Insights data showed.

Another 70,000 t cargo is lined up for Oct. 3, with both upcoming cargoes set to arrive from the US.

Traders are expecting imports to remain healthy over the winter, with sources already seeing strong buying interest for October. Traders noted that about two cargoes already are being eyed for October delivery to Brazil.

This comes at a time when Brazil is expected to pay premiums to European prices to attract selling interest and pull cargoes away over winter to help feed regional demand.

Platts, part of Commodity Insights, assessed DES Brazil for deliveries 15-45 days forward at $11.761/MMBtu Sept. 25, up 1.5 cents from Sept. 24.

This put DES Brazil at a 3.8-cent/MMBtu premium versus the DES Northwest European marker for November, or a 3-cent/MMBtu premium versus the Dutch TTF gas hub price.

Although Brazil receives pipeline volumes from Bolivia, growing LNG infrastructure has allowed Brazil to procure more volumes on the spot market to feed growing domestic demand from power generation.

"Even with gas from Bolivia, if Brazil needs more volumes, they will get it with LNG," an LNG trader said, pointing to increasing cargo volumes into the region.

LNG reliance

While Brazil's LNG demand is seasonal and varies depending on alternative supply sources, such as hydro reservoirs as well as renewables, the droughts this summer, which led to lower hydro reservoirs, and new gas-fired plants have added to the need for LNG.

The rise in buying activity and imports from Brazil this year has surfaced as the increasing usage of thermal power plants to help limit the impact of lower hydro levels pushed the market to impact more cargoes.

Notably, so far this year, Brazil has imported 31 cargoes, Commodity Insights data showed. This compared with 13 cargoes in 2023 and 39 cargoes in 2022 over the corresponding period.

"Brazil is a net importer of natural gas, by pipeline and in the form of LNG, because its indigenous gas production is insufficient to meet domestic demand," Commodity Insights analysts said. "Within the domestic market, LNG serves primarily as a flexible fuel source for the nation's gas-fired power fleet, which, in January-February 2024, accounted for just 7% of Brazil's power generation owing to this market's substantial hydroelectricity generation."

The analysts added that in 2022 and 2023, strong rainfall and high reservoir levels in key hydroelectricity production areas in southern Brazil reduced LNG imports to 1.9 MMt/year and 900,000 t/year, respectively.

Furthermore, below-average precipitation during the historical wet period from December through April led to Brazil importing 600,000 t from January through April, up from 100,000 t in the corresponding year-ago period.

"Given limited growth expectations for hydroelectricity capacity, we expect Brazil's gas demand to rise, driven by the power sector," the analysts said. "This shift presents an opportunity for LNG, although domestic or Bolivian gas could hold a strategic advantage in serving demand growth."

Bolivia's stated-owned YPFB and Argentina's state-run YPF launched the drilling of an exploratory well for natural gas Sept. 21 in a bid to turn around a decade of decline.

The decline in gas exports has led neighboring Argentina to all but halt its imports from Bolivia as it develops the huge Vaca Muerta shale play in Patagonia, with plans to pipe gas to Brazil through spare capacity on Bolivia's pipelines.

Waterborne competition

Given the expectations for Brazil to purchase spot volumes of LNG over fourth quarter 2024 and Q1 2025, sources have kept a relatively bullish sentiment for winter as competitive demand hubs look to raise prices and pull in needed cargo tons.

For now, European demand remains relatively depressed, with the European share of US LNG exports dwindling year on year. From Jan. 1 through Sept. 25, 2022, volumes to Europe accounted for around 68% of US LNG before dropping to nearly 65% in the same period of 2023 and 48% in the same period of 2024, Commodity Insights data showed.

At the same time, US exports to South America dipped to 5% in 2023 from 6% in 2022, before growing to around 7% in 2024, spearheaded by increasing exports to Brazil, which have seen a near 69% increase of US supply, to 1.4 MMt so far in 2024 from 830,000 t for all of 2023.

This has heightened sentiment for this winter, with traders expecting steep prices in Q4 2024 should cold weather ensue and Europe looking to replenish domestic demand with LNG cargoes.

"Seems like the sentiment is that Europe may have to pay premiums to TTF in winter to secure volumes," an LNG trader said about the expected buying interest from Latin America and Asia, as well as reduced LNG exports from Egypt.