Petrobras Shares Record Worst Drop in 34 Years; Oil War Threatens Government Revenue

RIO DE JANEIRO, BRAZIL – The largest drop in the price of the oil barrel in almost 30 years generated a panic day in the financial markets on Monday, already shaken by the coronavirus epidemic, causing significant losses for the main oil and energy companies in the world.

In Brazil, Petrobras lost R$91.1 billion in market value, the largest drop since 1986, according to Economática data. The oil company’s shares dropped by almost 30 percent, listed at R$16.05 at the close of trading.

The sharp drop in oil prices came after Saudi Arabia signaled it would raise production to gain market share and cut its official selling prices in reaction to Russia’s refusal to contain production due to declining demand caused by the Chinese virus.

The trend should affect the price of gasoline, Petrobras’ profit, ethanol production, and revenue, according to experts. It is still too early to assess how long this dispute will last and what all the effects and damage caused by this new price war will be. For the coming days, the certainty is of heavy speculation.

The meltdown of Petrobras’ shares occurred on the same day that the stock market circuit breaker in Brazil had to be triggered, a safety measure used to interrupt all of the Exchange’s operations. Negotiations were paralyzed for 30 minutes, but this was not enough to appease the market. The Exchange crashed 12.17 percent, at 86,067 points on closing, the highest daily percentage drop this century. The dollar, which started the week at a sharp spike against the real, reaching over R$4.79, closed the day at R$4.72.

Saudi Arabia’s decision may affect Petrobras’ cash generation, as well as its plan to divest and settle debts, which was pushed up by the dollar. It is expected that the company will lose revenue with the drop in oil prices. “The price above 50 dollars was helping in the profitability and the debt reduction”, explains Walter De Vitto, from the consultancy Tendências.

Last year, Petrobras had profits R$40 billion, the greatest in its history. The trend now is for less interest from investors in oil exploration. There are at least three oil rights auctions planned by the government for this year.

Impact on Brazilians’ pockets

As far as consumers are concerned, the news is positive. With the drop in oil, the state company should reduce the price of gasoline, given that the company has adopted an international parity policy since 2016 to define the price of gasoline it sells to the distributors.

If fuel prices are reduced at the service stations, the drop could produce some negative effects for the Brazilian economy. One of the impacts will be on the revenue of states, which collect ICMS (Tax on the Circulation of Goods and Services) at the pumps. With a lower price, collected taxes also decrease.

With cheaper oil, the federal, state, and municipal governments will also collect less royalties. “This trend further aggravates the deficit of states such as Rio de Janeiro, which long ago established an irresponsible ‘oil-dependence’,” explains Ildo Sauer, deputy director of the Energy and Environment Institute of USP (IEE) and former director of Energy and Gas of Petrobras.

Even this year’s federal budget is in danger with the Brent oil value cut, since it directly affects the federal government’s revenues from royalties. When submitted to Congress, the economic team considered the average price of the oil barrel at US$58.96–now a distant reality from this Monday’s US$31 price.

President Jair Bolsonaro ruled out raising the CIDE, the Contribution of Intervention in the Economic Domain that focuses on fuels, so as to increase federal revenues capitalizing on the sharp drop in the price of oil on the international market.

He said the trend is for fuel prices to drop in refineries. Bolsonaro also reiterated that Petrobras will maintain its pricing policy without political interference. “There is no chance of the government increasing the CIDE to sustain fuel prices,” Bolsonaro said on Twitter.

The drop in oil also hinders pre-salt exploration, as with the drop in the Brent crude value, investments to capture oil in deep waters may not yield sufficient financial return to investors.

Sauer points out that the ethanol market should also be affected, since the product may not be able to compete with cheaper gasoline. Factories should reduce production, which could deepen the crisis in the sector. “Importing economies want cheaper oil because it lowers the cost of several production chains. Today we see the markets crashing because of the coronavirus epidemic and because of all the oil companies that will lose out,” he says.

The price war took on new dimensions on Saturday night when Saudi state oil company Saudi Aramco announced an increase in production and a reduction in the price per barrel after Russia refused to follow an agreement of the Organization of Petroleum Exporting Countries and allies (OPEC+). The aim of the measure would be to force the Russians to return to negotiations on production cuts, in order to tackle the abrupt drop in global demand due to the spread of the coronavirus.

In turn, Russia stated on Monday that it is capable of sustaining lower prices for ten years. “In the coming days, there will be much speculation. The main question is: is this a move by Saudi Arabia that it will play? Or is it a threat just to see if Russia will repent?”, wonders De Vitto, from the consultancy Tendências.

In a report released on Monday, the International Petroleum Agency (IEA) projected that oil consumption could drop by as much as 730,000 barrels a day this year, the steepest decline since 2009 when the effects of the 2008 financial crisis were still being felt.

Source: El Pais

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