September 17, 2019 / 3:41 PM / a year ago

Oil price spike set to improve ethanol outlook in Brazil

SAO PAULO, Sept 17 (Reuters) - A spike in oil prices following recent attacks on facilities in Saudi Arabia is expected to boost an already positive outlook for ethanol in Brazil, according to analysts and industry representatives, further relegating sugar to the background for mills that largely process ethanol.

If higher oil prices lead to increased gasoline prices in Brazil, ethanol would keep its price advantage over the fossil fuel at the pumps, potentially leading to strong demand and good profit margins for cane mills, market participants said.

Assuming such a scenario plays out, mills - which already use 75% of cane to produce ethanol and the rest for sugar - would continue to favor ethanol due to better returns, reducing expected sugar production this year, they said.

“But it all depends on what Petrobras will do, if it will pass on to gasoline the increase in international oil prices,” said Antonio de Padua Rodrigues, a director at cane industry group Unica.

Brazil’s state-controlled oil company Petrobras, or Petróleo Brasileiro SA, has a near-monopoly on refining in the country, defining prices for gasoline and diesel.

Two years ago, the company adopted a policy of tracking international oil prices, but it has faced pressure from the government to cap increases as the new administration tries to boost its popularity.

A crippling attack here on Saudi Arabia's oil facilities over the weekend slashed global output by 5%, and sent oil prices up over 14% on Monday. U.S. intelligence officials said evidence pointed to Iran being behind the attack, raising concerns over a potential response that could further unsettle world markets and global supply.

After the attack, Petrobras said it would exercise caution regarding price decisions. Oil prices fell slightly on Tuesday, but remain much higher than last week.

“It is going to be a test for Petrobras, let’s see,” Rodrigues said.

Unica has in the past criticized the oil company for failing to adjust domestic fuel prices when oil prices change.

Tomas Manzano, strategist for Copersucar, a leading Brazilian sugar and ethanol merchant, said the new geopolitical risk should sustain higher oil prices in coming months, making room for potentially higher ethanol prices as well.

“The expectation is for some kind of gasoline price increase, which will benefit ethanol,” he told Reuters on the sidelines of the Novacana Ethanol Conference 2019 in Sao Paulo.

Fabio Meneghin, a sugar and ethanol analyst with Agroconsult, said mills could reduce ethanol sales in the spot market this week, waiting for a possible move from Petrobras.

Sugar and ethanol consultancy FG/A, however, had a different view. Partner Juliano Merlotto believed high levels of ethanol production in Brazil will lead to very large stocks in the coming months, pressuring prices and profit margins for mills.

“Oil prices would probably return to previous levels once the supply situation stabilizes, and then we are going to have a lot of ethanol in the market,” he said. (Reporting by Marcelo Teixeira; Editing by Bernadette Baum)

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