Oil and Gas

Despite low price, Brazil has largest oil trade surplus

Sep, 22, 2023 Posted by Gabriel Malheiros

Week 202338

Despite the rise in oil prices to last year’s high levels, Brazil’s trade balance in this commodity and its products posted a surplus of $13.8 billion from January to August, a record for the period. In the same months of last year, the positive balance was $10.35 billion. According to the Foreign Trade Indicator (Icomex) of the Brazilian Economic Institute of the Getulio Vargas Foundation (FGV Ibre), the sector’s trade surplus also reached a record in 2022, with a total of $15.48 billion on an annual basis.

Although the longer-term perspective forecasts a greater adjustment of current oil prices and the global movement of the energy transition is considered, experts say that the commodity is likely to remain important in Brazilian exports, driven mainly by volumes, in line with the expected increase in production until the end of this decade. Uncertainty is on the destination map of Brazilian oil.

The increase in export volume already marks the shipments of the oil sector. Icomex data show that from January to August this year, average export prices of oil and oil products fell by 25% compared to the same months last year, while volumes grew by 25.4%. When considering only the shipments of crude oil, there was a 30% increase in volumes and a 23.8% decrease in the average export price in August compared to the same month of 2022.

“Today, Brazil has a higher production than many OPEC [Organization of the Petroleum Exporting Countries] countries. And in a short time, it has become a relevant exporter in the international market,” said Helder Queiroz, professor at the Institute of Economics of the Federal University of Rio de Janeiro, and a former director of the National Petroleum Agency (ANP).

Crude oil is Brazil’s second most exported product, accounting for 11% of the revenue from shipments from January to August, after soybeans with 19%, according to data from the Secretariat of Foreign Trade. In 2022, $42.6 billion of crude oil was shipped, representing 13% of total Brazilian exports, a share only one percentage point behind soybeans.

However, the outcome of the oil and its products trade balance also depends on imports, mainly of products, on which Brazil is dependent due to its limited refining capacity. “Thanks in part to the pre-salt, Brazil has been self-sufficient in oil for more than a decade, but it has not and will not be self-sufficient in oil products,” said Mr. Queiroz.

According to Icomex data, the oil and oil products balance has been in surplus since 2016, and this year the positive balance increased compared to 2022, as the value of imports fell more than that of exports. Exports of oil and oil products totaled $33.6 billion in the first eight months of the year, 7.4% less than in the same period of 2022. Imports of the same product group totaled $19.8 billion, 23.6% less than in 2022. Imports of oil and products fell by 18.1% in average price and 6.6% in volume, in the same comparison.

Within products, Mr. Queiroz used diesel as an example. Brazil produces about 75% of the demand for this fuel and imports the rest, he said. “To be self-sufficient, it would have to build two or three more refineries, which is not on the horizon. You can’t make a refinery take a thousand barrels, it has a minimum scale, of more than 250,000 barrels. A refinery of that size costs about $7 billion to $8 billion.”

In addition, the world is moving toward decreasing, not increasing, consumption of fossil fuels, said Mr. Queiroz. “It is unreasonable to think that in 50 years we will have the same demand as today. With refining capacity limited, the expected increase in oil production is likely to be largely directed to exports,” said Livio Ribeiro, a partner at consultancy firm BRCG and a researcher at Ibre.

Walter De Vitto, an economist at the Tendências consultancy, said the current outlook for Brazilian refining capacity is for no significant change for at least the next four years. Among the investments already announced that could change the scenario thereafter, he mentioned the expansion and upgrade of the Abreu e Lima (Rnest) refinery in Pernambuco, which Petrobras is planning in its 2023-2027 strategic plan.

According to Mr. De Vitto, the consultancy’s current estimates show that the trade balance may see a slight decrease of 1.2% in 2023 compared to 2022, remain stable until 2025, and then return to growth from 2026 to 2030, favored by the expansion of production. After 2031, the expansion of domestic oil production tends to slow down, but the demand for products will continue to grow, which would lead to a reduction in the balance of the oil and products account. The projections, Mr. De Vitto said, considered assumptions for investment in exploration and production, the public accounts, the trade balance, and refining capacity.

Lia Valls, a researcher at Ibre and coordinator of Icomex, said that exports of oil and oil products have experienced many price fluctuations, but volumes have grown steadily. According to Icomex, the average price of oil shipments last year was 63.5% higher than in 2007, 15 years earlier. The volume shipped increased by 117.2% over the same period.

For Mr. Ribeiro, at least the increase in production expected by the end of the decade should find export opportunities, even with greater use of alternative sources. “When the oil age came, the use of coal didn’t end immediately.” Mr. De Vitto has a similar view. “Meeting energy needs does not change overnight. The sources will continue to complement each other, with an increasing delta for alternative energies.”

Brazil emerges as a larger supplier, said Mr. Ribeiro, at a time of reorganization of demand. In addition to the energy transition, he said, the map of Brazilian oil destinations still needs to be redrawn amid the restructuring of the market with the war between Russia and Ukraine. It is advisable, he said, to build strategies based on those changes.

China is the main destination for Brazilian oil shipments, with a share of 38.8% in 2022. While it maintains its position as the top buyer, China’s share has fallen sharply from 64% in 2019. Part of this fall is due to the displacement of Brazilian oil by Russian supplies, which, under European sanctions after the outbreak of the war, sought new markets and increased its sales to the Chinese.

The war changed the game in the oil market, said Mr. De Vitto. “A relationship was created between Russia and China, and it has gained momentum. It is expected to be maintained, with complementary interests.” He said that this happened in an earlier context, amid the conflict between China and the United States, which has already become more evident since 2018, in the struggle for global geopolitical hegemony.

“China remains an important destination for Brazil, but other countries have emerged in Latin America and a little in Europe. This is a trade diversion that comes from the creation of new parameters in the market,” said Mr. Ribeiro. “But it is unclear,” he said, “if Brazil is really entering new markets and will keep them, or if it is something temporary because of the war. The tectonic plates of the oil market are shifting. What is known is that we will not return to the pre-war level.”

According to government data, the United States was the largest foreign buyer of Brazilian oil in 2022, after China, followed by Spain, Chile, and Portugal. Except for the Americans, the other countries increased their share of Brazilian oil exports from 2019, the pre-pandemic period, to last year. Spain’s share grew to 8.4% from 3.4% during this period. Chile and Portugal went to 7.4% from 5% and to 5.9% from 1.1%, respectively.

Mr. De Vitto said that among the regions that consume a lot of energy and produce little, China, the Far East, and Europe stand out. “There are also several countries that can consume, albeit at lower levels. The war has also put the strategy of energy diversification back on the radar.”

In 2007, Brazilian oil was shipped to 17 countries, according to government data, and was the main product Brazil exported to six of them: Chile, the United States, St. Lucia, Portugal, Peru, and Aruba. Last year, the number of countries on this list rose to 11, with the departure of Saint Lucia and Aruba and the arrival of the Netherlands, Uruguay, South Korea, Spain, Bonaire, Jamaica, and Israel. In total, there were 25 destinations. Last year, Brazil was the first external supplier of oil to Chile and Portugal, with 73.2% and 36.7% of foreign purchases of crude oil in the respective countries.

Among Brazilian shipments to South America in 2022, oil was the main product exported to South America, with a share of 9.3%, followed by 8.4% of automobiles, which had always been the leader in this ranking. For Mr. Ribeiro, the permanence of this picture is also difficult to assess.

One important factor, he said, is the production of Vaca Muerta, in Argentina. The oil and gas region is a large area of unconventional oil, or shale gas, and could have great potential to supply South American countries. One uncertainty, said Mr. Ribeiro, is the investment needed to develop and sell the field’s oil amid Argentina’s severe crisis.

Brazil currently has a concrete forecast of an increase in energy supply at a peculiar and favorable time, said Mr. Ribeiro. “We have to take advantage of it. The fact that we have manna falling from heaven doesn’t mean we’re going to use it properly.”

For him, policies must also be put in place to ensure that the “manna” benefits the entire population, as the exploration of the commodity generates more concentrated activity. Foreign trade data reflect some of this. Although it is the second most important item in Brazil’s foreign sales, oil was exported by only 12 municipalities in 2022, based on a minimum value of $10,000 per year.

Source: Valor Internacional

To read the original news report, visit: https://valorinternational.globo.com/economy/news/2023/09/22/despite-low-price-brazil-has-largest-oil-trade-surplus.ghtml

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