This Insight was published on the 11th March in Portuguese.

After almost two months withholding the increase in gasoline, Petrobras partially passed on the rise of international prices to the refineries.
Gasoline prices at the refinery will be increased by 18.7%, reaching to R$3.86/litre.
What does this mean for ethanol parity and sugar prices?

Close to International Parity

In January, when Brent was at 85 USD/bbl, Petrobras made a full adjustment in gasoline prices.
57 days later, and with Brent oil 30% higher, the company made a new fuel price readjustment – but this time partially.
As of the 11th March, the price of gasoline at the refineries will increase by 18.7% to R$3.86/liter.

With this, the gap between the domestic and international gasoline prices reduces to less than 5%.
Petrobras made the adjustment after seeking government authorisation and warning about a possible risk of fuel shortages – according to sources, there was a risk of running out of diesel as early as April.
The company seeking government authorisation signals a reduction in decision-making autonomy amid high prices.

The Effects on Ethanol Prices

The price increase at the refinery will be passed onto consumers at gas stations, giving space for ethanol to rise without losing competitiveness.
This means ethanol (ex-mill) prices have potential to increase.

Today, the ethanol parity is at 17.87 c/lb, since the price of ethanol (ex-mill) is around BRL 2.9/liter.
With this revision, ethanol has the potential to reach a theoretical parity of 21/clb (No. 11 bases). – considering FX rate of 5.01 BRL/USD

The last time Petrobras readjusted prices in January, ethanol at the mills didn’t move.
On the contrary, even during the off-season and without fresh supply, biofuel prices fell in the following weeks.
Hydrous prices are a reflection of the drop in demand and the high parity at pumps, which has averaged 73% since January.

In January alone, there was a 9% retraction in fuel demand.
In addition, the hydrous market share dropped to 21%, the lowest level since June 2017.

But not everything is negative.
With the rise in gasoline prices being passed on faster to the pumps, the parity has already dropped below 70% (average SP), which should start to encourage consumer migration back to ethanol.
The movement of the Paulínia hydrous ethanol daily index was also positive, rising 4% to indicate that there should be an increase in the price asked by producers.
But still, demand for hydrous needs to recover significantly for the theoretical parity to reach 21c, considering an FX rate at 5.01 BRL/USD.

On the 10th March, the Gasoline Price Stabilization Account (CEP) was approved by the Senate, which changes Petrobras’ price policy in practice.
The CEP seeks to reduce price fluctuations at gas stations.
For the proposal to be implemented, it must still be approved by the house of representatives.
The idea behind the CEP is to establish a price band which gasoline can vary – a maximum price and a minimum price will be defined.
In short, it’s a mechanism to reduce the impact of price fluctuations that surges in the international market to be passed on to the national market.

This means that if the proposal is approved, a hike in the international prices will not be fully reflected domestically.
We therefore see a limit on the upside for ethanol prices.

For now, the gasoline price readjustment will be passed onto the consumer.
And this is positive for the ethanol market, as it allows the price to rise without impacting parity at the pumps.
However, we need to be aware of other variables that may affect the reaction of biofuel prices.
The 2022/23 crop starts now in April, bringing a fresh supply to the market.
Also, how will demand behave? Will it rise enough to be a price catalyst in the upcoming months?