Brazil gas prices on a downward trajectory

Market: Natural gas
13/11/23

Brazilian natural gas prices are down from a period of

volatility earlier this year and may continue to drop well into next year if geopolitical tensions do not drive up global crude prices.

The Argus-assessed Brazilian natural gas network daily average price hit its 2023 low of $10.80/mmBtu on 31 May, peaked on 27 September at $13.637/mmBtu and has since fallen to $11.744/mmBtu by 10 November.

Global oil prices — which are a key element of many Brazilian natural gas contract prices — have so far not risen in reaction to the Israel-Hamas fighting in the past month. Rather, markets have looked beyond the threat of a spreading conflict and instead focused on expectations that oil demand will drop in the coming months amid abundant supplies, incremental production growth and slowing global economic growth. This could mean a continuation of Brazilian gas' downward price trajectory.

The major gas contracts in Brazil are linked to a mix of factors, the most important one being oil prices — typically the North Sea Dated Brent index — but also to the US dollar-Brazilian real exchange rate, both Brazilian and US inflation rates, and the US benchmark Henry Hub index. Last week, the exchange rate reached a 2023-low of R4.90/$1, down from R5.93/$1 in May, according to Brazil's Central Bank.

"The uncertainty premium that lifted oil prices since early October with the eruption of the Israel-Hamas war has dissipated," according to a research note from Swiss banking group Julius Baer.

As the market shifts, the role of oil prices — especially the North Sea Dated Brent index — in Brazil's gas contracts increases. State-controlled Petrobras, Brazil's main gas supplier with over 70pc market share, relies on oil prices as the primary index for its contracts. It has accelerated oils influence on prices through a series of new contracts under varying conditions in the recent months. The season for new contracts is far from over, as many are due to end by December.

Petrobras also reintroduced gas-gas indexation using the US Henry Hub index in 2023, reflecting the ongoing transformation in energy market dynamics. If the trend of adding Henry Hub indexing into new contracts continues, as was seen in last month's long-term contracts, it could balance outcrude's influence on prices.

But that change in pricing influence is still slight. The latest contracts mostly just drop the percentage of Brent's influence included in the pricing formula, following the sharp rise in its influence last year, particularly after the start of the Russian-Ukrainian conflict. Prices in the new contracts hover around 11-12pc of Brent after reaching 16.7pc of Brent earlier this year.

The outlook for global crude heading into 2024 remains uncertain. Oil prices have lost most of the gains seen since Saudi Arabia started implementing its 1mn b/d additional output cut in July. Chinese demand remains uncertain, and growing signs of a slowdown in economic growth could keep a ceiling on prices.

By Betina Moura

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