Listen: Diesel flows shift as Brazil fuels up

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Jeff Mower:

Hello and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights, where today we'll be discussing a recent shift in diesel flows, specifically in Brazil, current diesel market conditions, and, in contrast, what's going on in jet fuel markets.

I'm Jeff Mower, director of Americas oil news, and I'm joined today by senior refinery editor, Janet McGurty, Latin American refined products editor, Maria Jimenez Moya, and US refined products editor, Ben Peyton. Welcome, everyone.

As the diesel imports into Brazil have risen in recent months, with April imports at around 7.8 million barrels up from 6.9 million barrels in February, that's according to S&P Global Commodities at Sea. Still, that was down from a recent peak of nearly 10 million barrels in January, largely because of a slip in imports from Russia, which last year became the largest supplier of diesel to Brazil. So, Maria, I wanted to start with you. Why are we seeing this change in flows from Russia to Brazil, and how long is that expected to last?

Maria Jimenez Moya:

Russia has dominated the Brazil market for over a year now, and it still continues to dominate it. Last year we saw exports from Russia to Brazil, around 90% of diesel imports of Brazil were Russian. Nowadays, that has dropped down to 62% being from Russia, 30% being from the United Arab Emirates, and 8% from the US Gulf Coast. So, we still see the majority of the barrels coming from Russia and Russia having a dominant position. However, what has changed, was the amount of barrels that are flowing in, it was because of the change in payment terms. This was due to the sanctions Russia is no longer allowed to deal in the US dollar currency. So, for months now, they have been doing deals with Brazil in different currencies. From what I've heard is that it's been two or three months that the currency deals have changed, and it is up to the buyer in what currency they want to pay. So, they can either pay in Reals, which is the Brazilian coin, or in the Russian coin, but we're no longer seeing US American dollars coin.

Also, what has changed is that, Brazil really is fully stocked up with diesel, so they don't have the need to keep importing diesel. We have seen this year that harvest season has started earlier, which also affects the diesel demand, as well as all the other vessels that have been flowing around the coast of Brazil. We have seen a cargo was for 87 days in the water, which is so unheard of because of the high demurrage and lateness fees that they would have to pay on that. Nowadays, we also see vessels that have been at the water for 40 days. So, because of the complications that they have had in Brazil at unloading the vessels, there had just been less of an inclination to import from Russia.

Jeff Mower:

I see. So, I saw that Commodities at Sea noted there were six vessels that loaded in January, February from Russia, en route to Brazil, and they were ultimately discharged at those ports in April. So, that's quite a delay, like you mentioned. You're saying that that's really the result of these payment terms issues?

Maria Jimenez Moya:

It is a combination of the result of the payment term issues and the market adjusting to using a new currency. But more than that, it's that Brazil really has been stocked up. So, all the tankers that could store the diesel are at capacity, so they don't really have the need to import more product.

Jeff Mower:

And what about the Russian diesel supply? We've seen that Russian diesel output is actually down a bit because of maintenance, really because of these drone attacks. There's something like 4.1 million barrels a day of Russian refining capacity within the strike zone of drone attacks from Ukraine. I'm not sure how much diesel that's impacting, but I imagine it's taking some of that supply off the market.

Maria Jimenez Moya:

Yeah. Another thing that we have seen is just, Russia truly is prioritizing keeping their diesel inside of Russia because of the payment terms. So, it is just less of an incentive for Russia to export their products elsewhere.

Jeff Mower:

Yeah, I was mentioning the other day, Russia came out and said they may lift... They currently have a ban on gasoline exports, but they said the other day they might lift that ban on gasoline exports. They don't really have a ban on diesel exports, but like you said, they've been asked to redirect those flows to domestic markets, which I imagine has made it a little more difficult, obviously, to export to Brazil. But like you said, I think it's interesting, you said Brazil is stocked up. Why is Brazil, apart from the import picture, when you think of Brazil importing from Russia, from the US, and I know they've imported from several other countries as well, it looks like they've maybe expanded their supply situation. Are they also increasing domestic supply there?

Maria Jimenez Moya:

I don't think Brazil is going to supply their own diesel. However, what has changed is, a new biodiesel mandate in Brazil. And because of the mandate, it has decreased the amount of diesel that they need, because the mandate now requires them to blend 12 to 14% of their diesel. So, that displaces the amount of diesel that they need to import.

Jeff Mower:

Oh, sure. And that's expected to rise going in the future. I think that rises to 15% next year.

Maria Jimenez Moya:

Mm-hmm.

Jeff Mower:

Let's see. Yeah, I'm not sure how that looks further out down the road, but yeah, that will definitely take some of that supply off the market. Before we continue, I want to take a moment to tell you, our listener, about some new refined products price assessments we launched in April. On April 1st, Platts launched gasoline, diesel, and jet fuel cargo prices delivered into Florida. Why Florida? As Florida's population has increased, so is its demand for refined products. However, the state is isolated from the rest of the country, as there are no major refined products pipelines into the region. Also, Florida has no refineries, so Florida depends on supplies from the US Gulf Coast via Jones Act vessels, and for refiners overseas.

These new assessments reflect waterborne delivery into Port Everglades and Tampa. If you'd like to learn more about these Florida assessments, be sure to check out the link we've included in our show notes. So, Janet, what do you think as far as current diesel conditions now in the US? Okay, so you've had some flows get redirected, the US isn't exporting as much to Brazil now, but it still has a bunch of customers. I think I saw the most recent EIA data showed diesel exports at something like 1.5 million barrels a day. What are conditions like for diesel right now in the US?

Janet McGurty:

So, diesel exports to anywhere from the Gulf Coast, which is the largest exporting region that we have for refined products, was very low in, I think it was February. It fell and the reason was because we had a heavy turnaround season here and there just weren't barrels available to move. So, we exported 950,000 barrels per day of ultra-low sulfur diesel in February, and that was 900,000 in January, and 1.168 million in December. And the prices rose, so the February ULSD export prices, which we had Platts track and assess, was about 20 cents a gallon more in February, because we had less barrels going overseas. So, there was a shortage everywhere. That said, it's a mixed picture and it's messy.

The bigger refiners, like Marathon and Valero, who are big into exports, they're okay. Valero said they exported 153,000 barrels per day of diesel in the first quarter, and it was down, year over year, quarter over quarter. And he says, "I wouldn't read that as lack of demand, but rather as a result of heavy turnarounds." So, here in the US, it depends on where you are, quite honestly. Now, for example, in California, where renewable diesel is now 60% of all California diesel, that's because of their low carbon fuel standard, which encourages renewable blending. And we have the same in Washington, who has an LCFS program, as does Oregon. So, on the West Coast we're seeing there's a good amount of diesel, because of the renewable is making inroads into the petroleum-based diesel.

We have two refineries there which have shut down completely from petroleum-based to making renewables, including renewable diesel and sustainable aviation fuel, SAF. So, we have extra there, but pretty much it's kind of tight everywhere else. Everyone's seeing it's either same demand, is slightly below last year in that they're looking through their systems. I'm talking about big refiners like Valero, Marathon, Phillips 66. They're saying, "It's either flat, gasoline demand is flat, everything is kind of flat." Jet is the one that is slightly higher, but they don't see that much of a difference, and they think that once planting season comes in and with the economy picks up a little bit, because diesel is the fuel of commerce, and people start ordering more from Amazon and more trucks are driving on the road, they see it picking up back to the levels where it was the last few years.

Jeff Mower:

Sure. We have seen diesel loadings to Europe pick up a bit. I think I saw in April, US exports, according to Commodities at Sea, were slipping, diesel exports were 32, 33 million barrels. 22 million barrels goes to Latin America, which seemed fairly steady, 10 million barrels to Europe. And now, that was a bit of a pickup. And I think that's, again, related to what's going on with Russia. We're kind of backing supplying some of the countries there that aren't breaking into those Russian barrels. But again, I'm curious to see how long that plays out. A lot of these barrels, I know, are termed up, but what about the current prices? Ben, you've been covering the Latin American markets, I believe. What sort of price advantage do either the US or Russian barrels have right now?

Ben Peyton:

We heard recently that Russian diesel barrels into Brazil, were heard recently discounted as much as 20 cents per gallon. So, we're saying that there's a strong incentive to take Russian barrels over US Gulf Coast, which is why we're seeing that shift in flows from US Gulf Coast loadings. Typically, that would go to Latin America, or heading transatlantic to Europe now.

Jeff Mower:

And compared to diesel, on the jet fuel front, it looks like jet fuel demand's pretty strong. That's what I'm seeing at least. We saw some data out of the International Air Travel Association, I think they said earlier this month that international traffic rose 18.9% year-on-year in March, so it's going pretty strong

What are jet prices like currently? Are we seeing elevated prices in the Gulf as sort of benchmark prices?

Ben Peyton:

In the US, we've seen a well-balanced market for the first time in a while, where the supply and demand balances that we were not used to seeing during the COVID-19 recovery, have returned to a little bit more of a normal market state. So, we are seeing an increase in air travel demand above pre-pandemic levels, and we're seeing stronger demand in Asia and in Latin America. We're seeing international demand being the driver for higher air travel demand. And some of the things that could cap demand would be Boeing order delays and more efficient, larger planes that have larger capacity could also dent jet fuel demand.

Jeff Mower:

And now, how about sustainable aviation fuel? We talked a bit about biodiesel eating into conventional diesel demand and consumption in Brazil. How about sustainable aviation fuel? That has still a ways to go, I imagine. Janet, what are you hearing on that, the latest on SAF?

Janet McGurty:

Well, sustainable aviation fuel has jumped over renewable diesel, even though it is more expensive to make. You use the same feedstocks and you use the same process. A lot of times it's a converted diesel hydrotreater or hydrocracker, but it's a little more expensive to make SAF, because you need more hydrogen and it also needs a more expensive catalyst. That said, SAF demand, because of the incentives that are out there, it's growing much more quickly. It's outpacing renewable diesel. S&P Global Commodity Insights, our analysts, say that SAF supply is 5,600 barrels per day this year, and demand is 7,250. So, in renewable diesel this year, supply is about 340 barrels per day, while the supply is 207,000. So, that's a much closer gap. And this is before a lot of projects have come on. Like I said, two refineries, Phillips 66 Rodeo Refinery just began, stopped processing crude at the beginning of this year and is making SAF by the end of the year, and they already make renewable diesel.

So, SAF, there's a lot of incentives. States have their own incentives, there's the IRA, the Inflation Reduction Act, which has an extra incentive for SAF. With the Greek model now, everyone's trying to figure out what that does to ethanol as a fuel, ethanol to jet SAF rather than using renewables. So, SAF is kind of interesting, there's a lot going on in the SAF space.

That said, today, Park Petroleum, which is a small refiner on the US West Coast, they have the only refinery in Hawaii. So, jet fuel to them is a very important fuel because of the tourism in Hawaii. So, they're very interested, but they were going to make SAF at one of their refineries in Washington state, in Tacoma, and they said they weren't going to do it, because again, it's a little too iffy now. People are concerned about what's going to happen down the road. The elections this year, these SAF credits, how long are they going to stay? So, that's kind of putting a bit of a damper, but not a whole lot, because Europe and other parts of the world don't have those and they still have a strong demand and requirements.

Jeff Mower:

I'll leave it at that. Thanks Janet, Maria, and Ben for joining me, and thanks again to our listeners for tuning into this episode of the Platts Oil Markets podcast. This Oil Markets episode was produced by Maite Perez in Mexico City.