Petrobras keeps fuel prices steady for now

Brazil's state-controlled Petrobras will not immediately increase domestic fuel prices in response to a crude price spike triggered by the 14 September attacks on key oil installations in Saudi Arabia.

The decision is the latest wrinkle in the company's effort to align domestic fuel prices with the international market under a policy it adopted in October 2016.

"Recognizing that the oil market is volatile and that the sudden price reaction to the event may be mitigated as further clarification on the impact on world production is known, Petrobras decided to analyze the market in the coming days, and not make an adjustment immediately," the company said, adding that it will continue to monitor the market.

Analysts have warned that abrupt wholesale price increases for gasoline and diesel could harm Brazil's fragile economic recovery. But a new price freeze also raises doubts about Petrobras' commitment to import price parity.

Petrobras last increased the wholesale price for gasoline, without ethanol, by 1.2pc to around R1.70/l ($0.41 at the time of the adjustment) on 5 September. Diesel was raised by 2.49pc to an average of R2.3/l on 13 September.

Diesel sales in Brazil averaged 1.05mn b/d in July, a 4.1pc year-on-year increase and the highest level since August 2018, according to data from oil regulator ANP. Domestic diesel production averaged around 705,000 b/d in July, down almost 12pc from a year earlier. Imports of the product in July averaged 221,000 b/d, up 52pc year on year.

Gasoline sales averaged around 655,000 b/d in July, a 5.6pc increase over June and a 7.7pc year-on-year increase. Domestic gasoline production averaged around 445,000 b/d in July, a 9.8pc increase compared with the same period of 2018.

Gasoline imports averaged 115,725 b/d, the highest level since February 2015. Imports of the product in the first seven months have jumped by around 35pc compared with the same period of 2018.

Fuel imports into Brazil expanded significantly in 2017 after Petrobras amended its pricing policy to allow for daily price changes, but slowed throughout 2018 as the company became more aggressive on pricing. Competitors have recently complained that Petrobras has been pricing below international prices, a claim the firm denies.

This is not the first time Petrobras has frozen prices in response to political developments. In May 2018, the company cut diesel prices in a failed attempt to end a nationwide truck drivers' strike. The 11-day work action ultimately forced the federal government to adopt a diesel price subsidy that ended on 31 December 2018.

In response to growing government concern over a new truckers' strike, Petrobras in April changed course on a planned diesel price increase and adopted a minimum 15-day price freeze for diesel and maintained an optional 15-day freeze for gasoline. After losing market share to imports, the company in June abandoned timing constraints for both products.

Petrobras uses US dollar-denominated futures contracts to hedge gasoline and diesel price changes.

Autonomous decision-making that is free of interference from the federal government, Petrobras' controlling shareholder, is seen as key to the company's plan to attract investors to the country's refining sector. The company is selling around half of its 2.2mn b/d of installed refining capacity.

Petrobras' 2019-23 business plan assumes an average Brent price of $66/bl for 2019.

Any negative downstream impact may be partially mitigated by higher upstream revenue. Petrobras will benefit from higher prices for its pre-salt export grades, including medium sweet Lula. Output from pre-salt reservoirs in the Santos basin has been growing rapidly in recent months with the interconnection of high-yield wells, a trend that is expected to continue through year-end.