Dec 4 / Victor Arduin

Energy Weekly Report - 2023 12 04

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"The entry of Brazil into OPEC is a significant milestone, as it brings the country closer to other relevant geopolitical players in crude oil market. However, it is still uncertain what role Brazil will play in the organization, as the country does not intend to participate in OPEC's production quota system."

OPEC+ Opens Its Doors to Brazil

  • As expected, following the 36th meeting of the OPEC and its allies, production cuts were announced, totaling 2.2 million bpd for the beginning of 2024.
  • Furthermore, Brazil was invited to join the organization. Despite being an important entity in the oil market, the question arises as to whether its entry hinders the country's ambition to become a leader in the energy transition.
  • In recent times, Brazil has solidified its position as one of the main oil producers in the region and a significant supplier of liquid fuels worldwide.

Introduction

Brazil has consolidated itself as an important oil producer in Latin America, surpassing neighbors that historically held the largest productions in the region, such as Venezuela and Mexico. In addition, Brazil's total liquid production is expected to reach a staggering 4.08 million barrels per day (bpd).This gives Brazil a competitive advantage in the global energy market, as it can produce both fossil fuels and renewable energy sources.

The entry of Brazil into OPEC is a significant milestone, as it brings the country closer to other relevant geopolitical players in crude oil market. However, it is still uncertain what role Brazil will play in the organization, as the country does not intend to participate in OPEC's production quota system.

Image 1: Montly Crude Oil Exports - Brazil (M bpd)

Source: Bloomberg, hEDGEpoint

Image 2: Annual Crude Oil Production, Imports & Exports - Brazil (M bpd)

Source: ANP

Brazil's entry into OPEC+ raises questions

Last week, Saudi Arabia, Russia, and members of OPEC+ agreed to reduce oil production by 2.2 million barrels per day (bpd) at the beginning of next year. Despite being an important move in support of prices, the main oil benchmarks closed lower, with WTI at $74.07 (-1.95%) and Brent at $78.88 (-2.11%).

If announcements of production cuts were, to some extent, expected by the market, the announcement of Brazil's invitation to join OPEC+ was a surprise. The Brazilian government confirmed that it is analyzing the invitation to join the organization in January of 2024.

There is no doubt that Brazil has consolidated itself as an important energy supplier in the international arena, both with fossil and renewable fuels. An example of this strength is that if the country's entry is confirmed, it would be the fifth largest exporter, with crude oil volume of 1.76 million bpd in October.

Image 3: October Crude Oil Export – OPEC & Brazil (M bpd)

Source: Refinitiv, ANP, Bloomberg

Brazil's potential accession to OPEC+ raises questions about its commitment to leading the energy transition. How can it influence the world toward renewable fuel consumption while participating in the world's largest fossil energy alliance? Additionally, joining the organization's quota system could hinder Brazil's ambitious goal of increasing oil production to 5 million barrels per day by 2030. Currently, the country's oil production stands at around 3.3 million barrels per day.

 Jean Paul Prates, CEO of Petrobras, the Brazilian state-owned company responsible most of the country's production, mentioned that Brazil would not participate in the quota system, but rather play an observer role in the organization.

In this context, the country's invitation to join the organization reflects the contradiction that marked the last meeting of OPEC+. While some countries are seeking to restrict oil supply in the market, others want to increase production. How can a consensus be built on a joint strategy to support prices if new members are not committed to the group's production policy?

Image 4: Annual Liquids Production Changes YoY - Selected Countries Forecast in 2024 (M bpd)

Source: OPEC

In Summary

While Brazil's unexpected invitation to join OPEC+ has raised questions, there are some potential advantages to consider. One would be gaining advance access to information on the group's actions, as OPEC+'s decisions have a significant impact on the energy commodities market. Additionally, joining the organization could improve ties with economically powerful countries like Saudi Arabia, United Arab Emirates, and others.

However, it is important to consider other challenges. Production cuts made by the organization generally have an upward impact on oil prices, resulting in higher prices of refined products, such as gasoline and diesel, ultimately exerting inflationary pressure.

In addition, joining the association of oil-producing and exporting countries could impact Brazil's image as a leader in the energy transition. Brazil has a high competitive advantage in the low-carbon hydrogen market, in the replacement of fossil fuels with biomass and biofuels, in electrification, and in carbon capture and storage.

For now, it's important to await the developments that will unfold in the coming months. There is a process to be followed before confirming Brazil's entry into OPEC+, making it clearer what role the country will play in the organization.

Weekly Report — Energy

Written by Victor Arduin
victor.arduin@hedgepointglobal.com
Reviewed by Alef Dias
alef.dias@hedgepointglobal.com
www.hedgepointglobal.com

Disclaimer

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