Feature: Russian discount for diesel fades even as Brazil's harvest demand grows

Brazil's already big thirst for diesel looks set to grow like the crops in the upcoming harvest, but sources doubt Russian barrels will fill the extra demand as has happened for most of 2023.

The price for delivered Russian diesel has narrowed to at least an 8 cents/gal discount to US-origin barrels, said one Brazil market source.

"Russia is the market maker, but the last two weeks they're not doing as much," he said. "We don't need to chase Russian parity."

In line with a trend of higher domestic production and reduced imports, an S&P Global Commodities at Sea(opens in a new tab) report Aug. 22 showed Russian diesel averaged just 45,000 b/d for the week ended Aug. 18, the lowest rate since the start of May.

US-origin diesel was last talked at flat to September NYMEX ULSD futures, the source said, while Russian-origin cargoes priced at minus 7 to minus 8 cents/gal, both on a DAP basis for delivery to southern Brazil. The Russian discount to US-origin was talked at 20 cents/gal for much of the summer but has tightened as Brazilian oil giant Petrobras sharply raised its output and international prices sharply increased.

Platts assessed delivered CFR cargoes on a net-forward basis to Paranagua from the US at $129.60/b Aug. 21, down $2.17/b on the day from its highest mark since Jan. 26. It had hovered from $90/b to $100/b for months until climbing steadily from late June along with the global market. Platts is part of S&P Global Commodity Insights.

"The refiner is producing more, so they put prices cheaper to keep the market share," a second Brazil trader said about Petrobras, adding it was running at nearly 100% capacity.

Sources said imports had a harder time competing due to the wide spread between import parity prices and Petrobras prices

Petrobras last adjusted wholesale diesel prices on May 17, decreasing them by 4.7%. Petrobras then unexpectedly raised prices closer to international parity, effective Aug. 16. The company said it raised diesel prices 25.8% to 76.15 cents/liter and gasoline prices 16.3% to 58.72 cents/l. The adjustments were the first since Petrobras adopted a new pricing policy for domestic diesel and gasoline in May, abandoning an IPP 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.

Huge sugarcane crop

The higher local prices ironically dissuaded some big distributors from importing Russian diesel that moved above the sensitive global price cap, the first source said. But sources said max domestic diesel output had a bigger effect as Petrobras aimed at market supply instead of market share.

Russia offers the lowest-priced diesel imports for Brazil, but Petrobras offers the best price, the first trader said. Whatever the source, Brazil needs the diesel, he added.

"We are expecting a tight market for the next couple months," he said. "We're experiencing a huge crop. The best crop in 10 years for sugarcane."

Brazil's massive agricultural sector is at full activity in the third quarter for its annual oil seed and sugarcane harvests.

(opens in a new tab) (opens in a new tab) (opens in a new tab)

Still, Brazil has historically had to import about 25% of its diesel, and Russian diesel has been flooding the market month after month. Sources have confirmed that roughly 80% of diesel imports were coming from Russia.

Brazil was the second-largest destination behind Turkey for Russian gasoil, according to an S&P Global CAS report Aug. 15. Russia loaded 103,000 b/d for Brazil the previous week for a seventh straight week over 100,000 b/d. Russian became the major supplier for diesel in Brazil in April. CAS shows that a record 163,000 b/d happened in June.

The US used to be the prime ULSD source for Brazil, exporting 49.47 million barrels in 2022, or 4.12 million barrels/month, according to US Energy Information Administration data. Such exports were halved by May, the latest reporting month. Kpler shipping data showed US exports of diesel to Brazil at only 750,000 barrels in July, although rebounding to 1.92 million in August.

A US-based broker said recently that Russia so dominated Brazil imports that they gave up brokering US-origin ULSD exports to Latin America's most-populated country. But with the spread narrowing, US brokers are seeing renewed interest outside of typical US refiner sales, he said.

"We don't broker Russia," he said. "The Russian diesel took away the Brazilian players for diesel for a long while. Now they're starting to ask about it. They're not buying, but they're asking."

The second Brazil source said Russian diesel has "totally changed" the market, creating more of a spot trading market for delivered cargoes as competitive origin points emerge. The development of hundreds of distributors also created a need for more transparency, the source said.

"Years ago, it had only the majors, but smaller competition has developed," the source said. "The market is developing, changing quickly."