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Sugar and Ethanol Daily Report

By: StoneX Intelligence Brazil, StoneX Intelligence Brazil

Brent oil breaks USD 110/barrel amid conflict between Russia and Ukraine 
 
Possible impacts on domestic fuel prices in Brazil

Market attention is still directed toward the conflict between Russia and Ukraine and its developments in the oil sector. While the market assesses the effects of sanctions on Russia and the possible consequences on crude oil and natural gas flow, Brent futures broke the USD 110/barrel level on Wednesday. 

Crude oil prices also found support in the volume that will be released from strategic US and other IEA members reserves of only 60 million barrels, below market expectations of a more significant amount due to uncertainties about Russian supply amid the conflict.  

Crude oil gains on the international market supported sugar futures. On the ICE/NY, for example, the #11 May/22 contract had an accumulated daily increase of 1.6%, closing the session at 18.64 c/lb. The #5 front-month contract reached USD 515.20/t (+1.2%) in London, keeping the London-New York differential (White Premium) at a level above USD 100/t. 

In the light of the oil market’s bullish factors, the concern continues to be how this will be passed on to domestic fuel prices in Brazil. Currently, StoneX calculations indicate that an increase of BRL 0.8014/liter would be necessary to maintain gasoline parity with international quotes. Although Petrobras claims that it will maintain its current pricing policy, the feasibility and risks of the current strategy will be tested this year. 

For now, the company says it will wait for the cyclical effects of the conflict between Russia and Ukraine to assess the size of the readjustment in refinery prices. So far, the need for revisions has been relieved by exchange-rate moves. However, with recent geopolitical issues, the dollar appreciated against the real, and this trend could be intensified during a year of presidential elections in Brazil. With the final consumer’s lower purchasing power, the push for the approval of a fuel price control policy has gained strength.
 

Ethanol-gasoline parity at São Paulo stations (%)
image 30479
Source: ANP. Design: StoneX. 

More recent data from the ANP showed that ethanol and gasoline prices posted a weekly decline of 1.3% and 0.3%, respectively, in São Paulo stations. With this, parity at the pumps is already at 69.8%, making alcohol consumption more advantageous in the state. In the event of a positive review of gasoline prices in the coming weeks, ethanol should follow suit, but in a way that keeps its competitiveness. 

Depending on this, ethanol prices may find support, as they seek more attractive levels in relation to sugar. On Wednesday, for example, ex-mill hydrous and anhydrous based in Ribeirão Preto operated at a discount of 9.3% and 5.4% from the front-month #11 contract, respectively. However, given strong fixation on the New York exchange, an involved of the sugarcane mix towards ethanol would only be feasible if its prices were to significantly increase, covering the costs involved in the operation. 

In any case, it seems likely that 2022 will be marked by a recovery of ethanol’s share in Otto cycle fuel consumption, even though its demand may be pressured by uncertainties in the macroeconomic field. In addition, mills’ returns with Decarbonization Credits sale through the RenovaBio program has also been more attractive, responding to the appreciation of CBIOs prices, which reached a high of BRL 100 last Friday (25).  

At the end of this week, StoneX’s Market Intelligence will release a special study with the main perspectives for FX and the oil and fertilizer markets, in order to assess the possible developments in the energy sector. 
 

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