Brazil's July Base Oils Output Rebound Narrows Reliance On Imports

Brazil’s base oils supply matched demand in July as domestic output rebounded and imports fell to a six-month low but still accounted for more than half of supply.

Total supply, or domestic output and imports combined, held at 140,400 cubic meters (124,000 tonnes) in July, almost unchanged from June and above typical monthly volumes of around 132,000 cubic meters over the past year, ANP data showed.

Output rebounded to more than 60,000 cubic meters in July from less than 39,000 cubic meters in June, when scheduled maintenance curbed production.

Imports fell to 80,300 cubic meters in July from more than 100,000 cubic meters in June. That cut their share of total supply to 57%, from 72% in June.

A higher share of domestic output eased Brazil's reliance on overseas supply, an advantage at a time when disruptions elsewhere are tightening availability and keeping prices unusually high.

But Brazil remained highly reliant on imports even with higher output, making reliable domestic production and a broader range of overseas suppliers key to maintaining supply.

Key Highlights

·         Brazil’s July output was its highest monthly volume in a year, well above the 47,000-cubic meter average of the past 12 months, while output's share of total supply reached its highest level in nine months.

·         Domestic output rose as production at Petrobras’ Reduc Group I plant rebounded to more than 53,000 cubic meters, from less than 30,000 cubic meters in June.

·         Demand, or domestic consumption and base oils exports combined, fell year on year for a third month but rose from June.

·         The resulting surplus over demand narrowed to less than 2,500 cubic meters in July from more than 24,000 cubic meters in June.

Market Repercussions

The tighter July balance left little room for Brazilian buyers to build stocks, sustaining the need for a steady flow of supply from both domestic and overseas sources, with overseas availability itself heavily dependent on the US.

That concentration left buyers exposed to disruption from either source, increasing the need to broaden their supply base.

July imports already reflected that shift, with supplies from alternative sources rising as US volumes fell. More regular shipments from those suppliers would reduce Brazil’s exposure to US supply disruptions, although the market would remain reliant on overseas supply.

Moving from spot cargoes to more regular supply would make that diversification more durable and spread supply risk across more sources.