Jul 23 / Victor Arduin

Fuel prices could remain under pressure in the second half of the year in Brazil

  Back to main blog page
"...the dollar is a fundamental component in Brazil's energy costs. When the country's currency devalues, the cost of purchasing imported oil and refined products increases."

Fuel prices could remain under pressure in the second half of the year in Brazil

  • Oil production in Brazil has grown considerably in recent years, making the country one of the main non-OPEC+ suppliers on the world oil market.
  • However, the country still depends on imports to supply its refineries, which were not designed to process domestic oil. In addition, a considerable part of the diesel consumed in Brazil comes from other countries.
  • In this context, both international energy prices and the value of the BRL affect the price of oil derivatives in the country, resulting in an increase in the price of gasoline in July.
  • The scenario ahead looks challenging, as the price of oil is likely to remain high and, even with the prospect of an interest rate cut in the US, the real has not appreciated in the face of the country's fiscal risks.

Introduction

Brazil has excelled in oil production in recent years, achieving self-sufficiency, i.e. the ability to produce enough to meet the demand of its domestic market. In addition, the surplus from its production has contributed to boosting Brazil's trade balance, with around 25% of the surplus recorded in 2023 coming from the sale of oil and oil products.

However, it is important to note that Brazilian refineries were not designed to process the type of oil extracted in the country, requiring imports to blend and achieve the ideal yield in the production of oil products. Furthermore, a significant part of the diesel consumed in the country is also imported, maintaining the country's relative dependence on international prices.

Therefore, the dollar is a fundamental component in Brazil's energy costs. When the country's currency devalues, the cost of purchasing imported oil and refined products increases. In this context, our focus today will be to discuss the impacts of the devaluation of the BRL and how this will affect fuel prices in the country.

Image 1: Brazil - Average Annual Production and Consumption (M bpd)

Source: ANP

Image 2: Change in Energy Futures and BRL YoY (%)

Source: Refinitiv

The rise in the BRL contributed to increase domestic prices

According to data from the IBP (Brazilian Oil and Gas Institute) and the ANP (National Petroleum Agency), since 2013 there has been a 165% increase in oil exports and a 59% drop in oil imports. This trend has benefited the Brazilian economy, where the increase in oil production has resulted in a boost to the country's trade balance. In 2023, for example, the country recorded a surplus of US$ 99 billion, with US$ 25 billion coming from the sale of oil and oil products.

However, the country is still dependent on imports, and international prices influence national energy costs. While some energy commodities have not seen a significant increase year-on-year, such as oil, which is around 3% more expensive, others, such as diesel and gasoline, have fallen by more than 11%. However, the BRL has risen by more than 17% in the same period, being the main factor behind the increase in the country's import costs seen in recent weeks.

Increasingly pressured by the domestic and international scenario, Petrobras had to raise the price of gasoline for the first time since August 16, 2023 (an increase of R$ 0.20 per liter), to an average of R$ 3.01.

Image 3: Brazil - Monthly Oil Exports (M bpd)

Source: Bloomberg

Brazil - Average Monthly Export Revenue (US$ FOB) and Brent (US$/bbl)

According to data from the IBP (Brazilian Oil and Gas Institute) and the ANP (National Petroleum Agency), since 2013 there has been a 165% increase in oil exports and a 59% drop in oil imports. This trend has benefited the Brazilian economy, where the increase in oil production has resulted in a boost to the country's trade balance. In 2023, for example, the country recorded a surplus of US$ 99 billion, with US$ 25 billion coming from the sale of oil and oil products.

However, the country is still dependent on imports, and international prices influence national energy costs. While some energy commodities have not seen a significant increase year-on-year, such as oil, which is around 3% more expensive, others, such as diesel and gasoline, have fallen by more than 11%. However, the BRL has risen by more than 17% in the same period, being the main factor behind the increase in the country's import costs seen in recent weeks.

Increasingly pressured by the domestic and international scenario, Petrobras had to raise the price of gasoline for the first time since August 16, 2023 (an increase of R$ 0.20 per liter), to an average of R$ 3.01.

Image 4: Brazil - Average Monthly Export Revenue (US$ FOB) and Brent (US$/bbl)

Source: ANP, Refinitiv


Summary

The growth in oil production in Brazil has contributed to an improvement in the country's trade balance. Although it is a bearish fundamental for the BRL, fiscal risks have depreciated the real and increased import costs.

In addition, forecasts indicate that the price of a barrel of oil could rise in the second half of the year. This could lead to an increase in the cost of refined products in the country, since much of the oil processed in Brazilian refineries is imported.

In general, the price of the main refined products futures, RBOB and HO, are lower this year compared to the same period last year. However, the hurricane season in the US could impact the market in the coming months, bringing upside risks to energy futures.

Even if Petrobras avoids passing on the volatility of international prices to the domestic market, the increase in these costs should make further adjustments inevitable in the coming months.

Weekly Report — Energy

Written by Victor Arduin
victor.arduin@hedgepointglobal.com
Reviewed by Ignacio Espinola
ignacio.espinola@hedgepointglobal.com
www.hedgepointglobal.com

Disclaimer

This document has been prepared by Hedgepoint Global Markets LLC and its affiliates (“HPGM”) solely for informational and instructional purposes, without the purpose of instituting obligations or commitments to third parties, nor is it intended to promote an offer, or solicitation of an offer of sale or purchase relating to any securities, commodities interests or investment products. Hedgepoint Commodities LLC (“HPC”), a wholly owned entity of HPGM, is an Introducing Broker and a registered member of the National Futures Association. The trading of commodities interests such as futures, options, and swaps involves substantial risk of loss and may not be suitable for all investors.  Past performance is not necessarily indicative of future results. Customers should rely on their own independent judgement and outside advisors before entering in any transaction that are introduced by the firm. HPGM and its associates expressly disclaim any use of the information contained herein that directly or indirectly result in damages or damages of any kind. In case of questions not resolved by the first instance of customer contact (client.services@hedgepointglobal.com), please contact our internal ombudsman channel (ombudsman@hedgepointglobal.com) or 0800-878- 8408/ouvidoria@hedgepointglobal.com (only for customers in Brazil).

To access this report, you need to be a subscriber.