Brazil fuel imports to fall from record as Petrobras cuts prices

[NEW YORK] Brazil fuel imports are set to fall from a record as the country's state-owned oil company lowers prices in a bid to regain market share.

Petroleo Brasileiro SA, which owns 13 out of the 16 refineries in the country, cut diesel prices by 47 per cent and gasoline by 38 per cent at the refinery gate since January. As a result diesel imported from the US and gasoline from Europe arrives at higher prices than the locally-produced fuels.

Diesel imports have slowed to a trickle, because most would arrive at a loss of as much as US$20 per cubic meter (approximately $3 per barrel), compared with profits as high as US$600 per cubic meter in 2016, according to people with knowledge of the situation. Brazil's imports of gasoline and diesel rose to a record last year as Petrobras refineries processed the least crude in 13 years, according to Bloomberg calculations with the country's oil regulator data.

"US refiners may see demand from Brazil coming off this year," Mark Broadbent, an analyst at Wood Mackenzie, said in an interview in New Orleans. "Petrobras is reducing prices, which means they will run the refineries at higher rates to try to satisfy the domestic demand." From 2011 until 2014, state-controlled Petrobras subsidized domestic fuel prices to help the government to keep inflation at bay. The producer started notifying clients in early 2016 that they would need to source some of their fuels elsewhere.

After reporting losses from mismanagement and because of a corruption scandal known as Carwash that started in 2014, the company in 2017 stepped up its policy to align domestic prices with those of the international market. Partly, the policy was to discourage competition, but at first this didn't work.

The phasing-out of subsidies attracted foreign companies to Brazil. Glencore Plc, Mercuria Energy Trading SA, Trafigura Beheever BV, PetroChina Co Ltd and Vitol SA are some of the names who set up shop in the Latin American country to try to grab a bite of the market. Earlier this month China National Petroleum Corp, which controls PetroChina, agreed to buy a 30 per cent stake in Brazil's fourth-largest fuel distributor TT Work. The increasing competition reduced Petrobras's market-share in fuel imports.

Diesel imports by third parties fell from 1.56 million cubic meters (about 10 million barrels) in November 2017 to 680,000 cubic meters in the fourth quarter of last year through February, according to Petrobras's annual results report). Petrobras's overall market share of petroleum products in sales fell to 74 per cent last year from 97 per cent in 2015 amid growing competition from foreign importers. Its share of the import market into Brazil fell to 4.3 per cent from 84 per cent in 2015, according to Brazilian government data.

Petrobras is seeking to regain market share and made some progress in February, Jorge Celestino, Petrobras's refining director, said during the fourth-quarter earnings conference call. Oil-processing should improve in coming months, he said.

Petrobras declined to make additional comments for this story.

Higher rates at refineries won't completely shut the doors for importers, says Mara Roberts Duque, a New York-based oil & gas analyst at BMI Research. Petrobras has failed to build more refineries over the years to help meet growing domestic demand, she says.

"Given a lack of downstream capacity growth, we do expect fuel imports will increase by 2 per cent this year," Roberts Duque said. While Petrobras will continue to be the main supplier of fuels to the domestic market, trading companies are going to lose market share.

BLOOMBERG