Global Slump in Crude Oil Prices Should Impact Petrobras

RIO DE JANEIRO, BRAZIL – Used as a reference by Petrobras, Brent oil recorded a sharp drop on Tuesday, April 21st and closed at US$19.33 (R$97) a barrel, its lowest since February 2002. The drop should have an impact on the Brazilian state-owned company.

According to experts, it could hasten cost-cutting, divestments, and production cuts in the short term. “All companies in the sector are expected to follow this line,” said Pedro Galdi, investment analyst at Mirae Asset Brokerage.

Petrobras had earlier announced investment cuts, suspension of dividends, wage and production cuts, and a R$40 billion loan to tackle the crisis. The Ativa brokerage analyst, Ilan Arbetman, pointed out that this low Brent price compels the company to start implementing subsistence policies.

“With the Brent at US$20, we have a higher level of dysfunctionality, as we know that no project with the Brent below US$30 is viable. Petrobras did not expect this. Not only Petrobras, but no oil company expected such a low price. Now it’s about subsistence”.

With the Tiradentes holiday in Brazil on Tuesday, and the São Paulo Stock Exchange closed, Petrobras closed down 3.51 percent on the New York Stock Exchange. The oil company has stock drawing rights (ADRs) in the USA, where the market was open.

Ricardo Macedo, professor of economics at the Brazilian Institute of Capital Markets (IBMEC), points out that the US$20 price for Brent oil compromises Brazil as a whole. “It’s something of concern, because the states still heavily rely on [oil] royalties. So it’s a much greater impact than just Petrobras: states and municipalities lose revenue,” he said.

On Monday, the barrel of Brent crude oil, traded on the London Stock Exchange and an international benchmark, had already dropped 8.9 percent, to US$25.57, its lowest since April 1st. The May Brent futures contract expired on March 31st.

“It is a very unexpected situation and nobody expected to see a situation like this, with such a big crisis, and it is a time to look ahead and review how economies will effectively work. It’s a time for people to rethink capitalism, as many people have put it”, said professor Macedo.

Ilan Arbetman, analyst of Ativa Investments, stressed the view that the oil company did not expect such a low price, and that 2020 will be an atypical year. “The focus will be greater on the projects that Petrobras has, it will have to stop carrying out several of them. A Brent under US$30 does not adequately reward any type of project,” he said.

The day before, the future WTI (West Texas Intermediate) oil barrel contract, a benchmark in the United States, had already collapsed and, for the first time in history, it closed negative.

According to experts, this reflects the imbalance in global supply and demand, with a major global economic slowdown due to the Covid-19 pandemic that is reducing oil consumption.

Gabriel Fonseca, an energy, oil and gas analyst with XP Investments, pointed out that the sharp drop in prices is part of a context of declining demand amidst the pandemic and the quarantines currently in place around the planet.

He recalled that the IEA (International Energy Agency) estimates a daily drop of 29 million barrels in demand for the commodity in April 2020, which far exceeds the recent agreement by Opep+ to cut production by 9.7 million barrels per day.

“In this scenario, the great concern is that global oil stocks will reach maximum storage capacity,” said Gabriel.

Saudi Arabia said Tuesday it is monitoring the oil markets and is ready to take additional measures to stabilize them with OPEC+ allies and other oil producers, the state news agency SPA reported, quoting a statement from the cabinet.

“The kingdom is interested in achieving stability in the oil market and is committed to Russia to implement production cuts in the coming years,” the statement said.

OPEC and allied producers, including Russia, a group known as OPEC+, have announced radical production cuts, equivalent to nearly ten percent of global supplies. But with worldwide economies virtually stalled due to shutdowns caused by the coronavirus, demand has plummeted by as much as 30 percent.

“The fight is on WTI. Future contracts, declining demand and limited storage. Today, OPEC’s people must be talking and a stronger reduction in supply is coming. It is impossible to assume that these low prices will last”, said the investment analyst Pedro Galdi, from Mirae Aset Brokerage.

Source: Folhapress