Roger Hirst [00:00:07] Welcome to the Corona Correction Series in association with Refinitiv, I'm your host, Roger Hirst. In previous episodes of the series, we heard from Luiz Braga and Daniel Buttino about some of the difficulties that Brazil's economy has faced. Brazil is also a significant player within the energy space. Corey Stewart is the Senior Energy Analyst at Refinitiv with a particular focus on the Americas. He highlights the impact that the crisis has had on Brazil's energy demand, as well as the wider impact on the global markets. 

Corey Stewart [00:00:37] Brazil, in absolute terms, has the second highest incidence of Covid-19 cases in the world. Breaking that down further, the country's infection rate is slightly better than that of the U.S. at 1.3%. But the fatality rate is higher at 3.5%. Not the worst, certainly not the best. Looking first at economic growth, the coronavirus certainly hasn't spared Brazil. After beginning to emerge from recession in 2017, Brazil's economic growth has been slow. In 2019, the country grew at about 1.1%, but the IMF sees Covid impacting Brazil in 2020 with over a 5% contraction. When it comes to South America, Brazil represents half of just about everything. The population makes up about half of all South America and when it comes to my world, energy, Brazil produces 55% of all crude oil produced in South America. It represents about half of South America's refined products demand and has just over 42% of the region's refining capacity. Aside from being an indicator of economic activity, Brazilian refined products demand is important in context of world energy demand and U.S. refined products exports. When we think about refined products, we generally think of three marquee products, gasoline, diesel and jet fuel. But for some countries, LPGs have a more crucial importance as well. In Brazil, LPG is important for cooking, and as Brazilians have been forced into staying home, LPGs are the only refined products where we've seen a boost in demand, actually a demand spike that has caused disruptions in an LPG supply chain. When things return to normal, we can probably expect relaxation and flattening of this demand going forward. When we consider the refined products the situation in Brazil rhymes with the rest of the world. Gasoline impacted but will recover with reopening. Diesel not as affected and jet fuel demand very subdued, with risk of returning to normal for some time - not returning to normal for some time. Where globally, gasoline and diesel may return to previous levels with no real growth for the next few years, jet fuel demand will not return to normal until after 2021. Gasoline is a special case in Brazil because of the country's use of ethanol. Where diesel experienced less of a demand loss across the board relative to other fuels, the import of middle distillates, diesel and jet fuel into Brazil from the United States fell from 2019 average of 156,000 barrels a day to about 125,000 barrels per day average over January through June of this year. If you just look at March to June, that figure drops to 95,000 barrels a day. This with the refining capacity utilization dropping from about 76% to just over 50% during the height of the pandemic. Of the 17 refineries in Brazil, Petrobras operates 15, and has recently had 8 of them up for sale in order to pay down its debt. It ended 2019 with $87 billion dollars in debt and focus on production. Covid put a damper on those sales but it looks like the company is now close to selling one of them. Coronavirus has ravaged offshore production in Brazil, but even with that, global crude demand for Brazilian grades has kept production there running strong. Brazil's and more specifically, Petrobras' aspirations are to increase its share of the world crude market. In fact, when the virus hit, Petrobras announced a 2020 cut in production, but soon had to reverse course because of demand. Brazil is a net exporter of goods, with the top exports being agricultural goods, iron ore and crude oil. And where do Brazilian goods go? Well, about a third go to China and half make their way to the United States. Of course, I'm mostly concerned with the crude oil piece and what we've seen is 28% of Brazil's crude exports landing in China in 2017. And now that number is something like 50 to 60%. China has indicated that they will take more, but as there has been some re-opening effort in Brazil, domestic refineries have started to ramp up runs to meet local demand. As we emerge from this pandemic, refined products demand will return, notwithstanding that the nature of how many of us work has likely changed. Even Petrobras foresees having 50% of its administrative personnel work from home permanently. This is from an energy company. There will be continued and increasing demand for Brazilian crude oil, but the other story will be the push pull of the U.S. China relationship, with Brazil and others in the middle. Refinitiv has a wealth of information, analytical tools and thought leaders to help you make data-driven decisions. There's more to this story than what I can cover here, so please be sure to join Jim Mitchell's and my weekly podcast, The Rundown Tank: America's Oil, where we discuss the Western Hemisphere's energy world, from the northernmost point of Canada, to the southernmost point of Chile. 

Roger Hirst [00:05:24] There's no surprise that the impact on Brazil's market has been quite severe. The corona crisis is still ravaging the country and after a weak recovery from the previous recession, the IMF now predicts a 5% contraction in the economy. Nonetheless, household demand for LPG has actually spiked and caused some supply issues. In terms of demand for Brazilian products, China has increased its share. Given the proximity of the U.S. election in which the U.S. China relationship will play a key part, China's increasing sphere of influence in the United States' backyard will no doubt be yet another point for debate in the run up to the poll. We'll see you later for another episode.