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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Is Brazil’s Oil Boom Immune To COVID?

An ongoing global supply glut and the COVID-19 pandemic have had a profound impact on the price of crude oil. Despite recovering after the March 2020 oil price crash, the international Brent benchmark appears to be trapped at around $40 a barrel. This is hampering efforts by many oil-dependent countries to bolster hydrocarbon production as a means of boosting economic growth to mitigate the damage caused by the pandemic. Brazil’s oil industry, however, is powering along in spite of sharply weaker oil prices, the impact of COVID-19, and the uncertainty surrounding the upcoming U.S. presidential election. Latin America’s largest economy has seen its vital oil industry holding strong in the face of the economic and geopolitical headwinds that are heavily impacting the region. Data from Brazil’s petroleum regulator, the National Agency for Petroleum, Natural Gas and Biofuels (ANP-Portuguese acronym) shows that oil output has remained steady but improved since the worst of the COVID-19 pandemic hit in May 2020. For September, Brazil produced on average almost 3.7 million barrels of oil equivalent daily, which while almost 6% lower than a month prior was only 1% less than for the same period in 2019. Most of the decline in petroleum output can be attributed to the shuttering of non-economic offshore shallow water wells and significantly decreased capital spending in response to low oil prices.

While global energy consumption has fallen dramatically during COVID, Brazil is experiencing strong demand for its light and medium sweet crude oil blends. National oil company Petrobras reported record oil exports of just over 1 million barrels daily for September 2020 and oil cargoes that averaged 983,000 barrels per day during the third quarter of 2020. While Brazil’s overall petroleum output softened during September 2020, notably because of the shuttering of shallow-water oil fields and onshore wells, all-important pre-salt production keeps expanding at a solid clip. According to data from the ANP, Brazil’s pre-salt fields during September pumped on average almost 2.6 million barrels per day, a healthy 13% increase compared to a year earlier. Pre-salt oil production now makes up 70% of Brazil’s total petroleum output compared to 61% in September 2019.

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Demand for the light and medium sweet crude oil produced from Brazil’s offshore pre-salt fields remains firm despite the overall declining demand for petroleum globally. That is important to note because demand for light sweet crude remains strong regardless of the impact of the COVID-19 pandemic on energy consumption. By the end of September 2020, Brazil was the third-largest supplier of crude oil to energy-hungry China. That can in part be attributed to the implementation of IMO2020 on 1 January 2020 by the International Maritime Organization which seeks to substantially reduce the sulfur content of maritime fuel to 0.50% m/m (mass by mass). Asian refiners also ramped up production because they are anticipating a speedier than expected economic recovery from the COVID-19 pandemic. Those refiners also chose to snap up large quantities of high-quality low sulfur content Brazilian crude at discount prices to build inventories. This was also a motivation for Beijing which took the opportunity to bolster strategic petroleum reserves by buying Brazilian crude oil at depressed prices.

That sharp uptick in Asian demand for Brazilian oil since the start of 2020 was responsible for China’s September 2020 imports from the Latin American country soaring by a solid 52% year over year to 4.49 million tonnes. For the first nine months of 2020, China’s imports from Brazil reached 33.69 million tonnes, a notable 15.6% greater than the equivalent period a year earlier. Those numbers reflect the growing thirst for Brazil’s high-quality low sulfur content and relatively high API gravity crude oil, making it cheaper and easier to refine into high-quality low sulfur content fuels that meet increasingly stringent sulfur regulations.

Brazil’s national oil company Petrobras is responsible for driving the Latin American country’s production growth, notably in the pre-salt fields, especially since international energy majors wound down capital spending in response to sharply weaker oil prices. For the third quarter of 2020, Brazil’s national oil company reported production of 2.95 million barrels of oil equivalent daily, which was 80% weighted to crude oil and other petroleum liquids. Petrobras was responsible for producing 94% of the Latin American country’s total crude oil and 96% of its natural gas during September 2020. The company pumped 64% of Brazil’s increasingly important pre-salt crude oil. Overall, Petrobras pumped 2.6% more oil and natural gas for the third quarter of 2020 than it did for the same period a year earlier. Importantly, the company’s pre-salt production for the quarter soared 21% year over year to an average of 1,651,000 barrels daily. This significant jump in pre-salt production can be attributed to Petrobras ramping up activity in the Buzios, Tupi, and Atapu offshore oil fields located in the pre-salt Santos Basin. Those fields are producing a medium sweet crude oil with API gravities of 27 to 29 degrees with sulfur contents of around 0.27% explaining their popularity among Asian refiners.

By Mathew Smith for Oilprice.com

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