Petrobras lifts frequency constraints on fuel pricing

Brazil's state-controlled Petrobras lifted timing constraints for gasoline and diesel price adjustments, a move the company says will make it more competitive.

The measure is the latest twist in Brazil's effort to balance a market-based fuel pricing policy against pressure from the powerful federation of independent truck drivers, which carried out a crippling nationwide strike in May 2018 that led the previous government to impose a diesel price subsidy.

In September 2018, Petrobras adopted a price hedge for gasoline and amended its pricing policy to allow for price freezes of up to 15 days. In December 2018, the company adopted a separate price hedge for diesel and allowed for price freezes of up to seven days. In March, the company expanded the diesel price freeze to a minimum to 15 days.

Those timing constraints have now been removed. "Immediate application of this review will allow Petrobras to reduce diesel prices in line with changes in international prices observed in recent days," the company said.

Petrobras cut wholesale diesel prices by 4.6pc today, the second successive cut in refinery gate prices at the company's 37 delivery points.

The price reductions, which were accompanied by decreases in gasoline prices, track a drop in international oil prices. Petrobras says it remains committed import price parity.

The decision to lift the timing restrictions is partially motivated by a risk of losing market share to importers with more dynamic pricing policies.

In October 2016, Petrobras adopted its international price parity policy, which allowed for monthly changes in diesel and gasoline prices. The policy was updated in June 2017 to allow for daily price changes in an effort to preserve market share.

Petrobras has clawed back market share since with thinner margins and more competitive prices—sometimes below import price parity, some competitors allege.

The removal of timing parameters comes on the eve of the nationwide roll-out of a pre-paid fuel card, which allows drivers to lock in a diesel price for 30 days. The card is scheduled for a nationwide launch on 25 June following a test run starting in May.

Truck drivers have held off on planned work actions as the government makes more concessions. Petrobras chief executive Roberto Castello Branco told lawmakers this week that the company has nothing more to offer them.

The frequent changes in fuel pricing policy revive old concerns of government interference in pricing decisions. In 2010-14 Petrobras was compelled by the populist government to sell fuel domestically below international prices, leading to crushing downstream losses the prompted the company to take on more debt. The opaque discretionary policy frustrated investors and allowed Petrobras to expand its dominant position in the refining sector.

The company is now looking to sell eight of its 13 domestic refineries--around half of its 2.2mn b/d domestic capacity--and potential investors are attentive to changes that could distort competition.