Petrobras Suffers Growing Pains in Brazil’s Freed Oil Investing Market

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Petrobras Suffers Growing Pains in Brazil’s Freed Oil Investing Market

Brazil's Fuel Market opens opportunities for Oil Investing

Brazil’s Fuel Market

Zema, a 94 year-old retailer of toys and appliances in Brazil’s interior, has become an unlikely thorn in the side of state-controlled oil behemoth Petroleo Brasileiro SA.

This year Zema, which also runs gas stations, got its first fuel import license and joined a fast-growing group of new players that managed to, at least temporarily, squeeze Petrobras out of a market it has traditionally dominated. The margins that lured Zema and other players were attractive enough to undercut Petrobras and nearly erase its imports this year.

“We saw an opportunity to buy cheaper overseas and decided to test it with a small load of diesel,” Rafael Rozario, Zema’s head of operations, said by phone.  “There are a lot of new importers around, even small ones like us.”

The growing competition has eroded Petrobras’s sales in its home market and even contributed to a decline in fuel production at its network of Brazilian refineries, all at a time it’s navigating stubbornly low oil prices and continued fallout from the country’s biggest graft scandal. The Rio de Janeiro-based producer has started fighting harder to regain control of a market it recently liberalized.

Petrobras' share of fuel imports dries up, opening opportunities for Oil Investing Market

Petrobras’s share of domestic fuel imports tanked in the first half of the year amid competition from outsiders, according to Brazil’s oil regulator. This year Petrobras implemented daily price adjustments to compress margins and make it less lucrative for the likes of Zema to bring fuel into Latin America’s largest economy.

For much of the past decade fuel imports were a source of pain for Petrobras and the investors in its stocks and bonds. The company was charged with guaranteeing fuel supplies to the country’s population even though the government, which controls Petrobras through a majority of voting shares, often forced it to sell imported fuel at a discount in an effort to combat inflation, causing tens of billions of dollars in losses during the bull market for oil.

Petrobras's refining division lost billions, opening opportunities for Oil Investing

The producer, which controls virtually all refinery output in Brazil, started notifying clients in early 2016 that they would need to source some of their imports elsewhere. Petrobras reviewed its contract with Zema last year, for example, and said it would guarantee only 70 percent of the retailer’s requests for fuels, forcing the group to find alternatives. Petrobras initially left fuel prices largely unchanged when oil prices collapsed in late 2014, driving up margins and luring competitors.

Then, last October Petrobras announced a new fuel policy that tracks international prices. The idea was to discourage competition and make margins less attractive. At first it didn’t work. Small companies like Zema continued to enter the market, often collaborating among themselves to share tankers.

“The growth of imports is a reaction to the change in Petrobras’ fuel strategy,” Decio Oddone, the head of the National Petroleum Agency, told Bloomberg this month. “The company has a new price policy and is no longer the only one responsible for Brazil’s supply.”

Brokers found work for buyers who couldn’t get their desired volumes from Petrobras. Oil regulator ANP received 36,200 import requests in the first half of 2017, a 26 percent increase from a year earlier.

Imports of gasoline and diesel rose 96 percent and 67 percent, respectively, in the first half of 2017, according to the ANP. Petrobras’ share of imports plummeted during the same period and it was even forced to re-export some fuels, according to the oil regulator. It’s refinery utilization rate sank to just over 70 percent, prompting Petrobras to implement daily price adjustments to compress margins even further.

Rozario is cautious about taking on the risk of another fuel cargo himself, and plans to continue buying from Petrobras and other large importers.

“This is a very volatile market, there are chances to gain a lot, but the risks are also big,” he said. “If Petrobras continue to price like this, I’m not sure we will risk again.”

Sea Horse Corporate Point of View

With the decline of Petrobras, smaller distributors have been able to compete in fuel imports in the national territory, thus achieving, at least temporarily, tightening Petrobras’ monopoly in the Brazilian fuel market.The growth in competition hurt Petrobras’ sales in its domestic market and directly affected the reduction of fuel production in its Brazilian refinery network. What is what’s what is what is what is Brazil? Monitor international fuel prices.


By | 2017-10-16T18:29:53+00:00 September 4th, 2017|Economy, News|0 Comments

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