Petrobras to reduce Brazil diesel, gasoline prices at refinery gate May 1

State-led oil company Petrobras will reduce Brazil's wholesale diesel and gasoline prices, effective May 1, in an adjustment that coincides with the end of a two-month holiday on federal fuel taxes, the company said April 30.

Wholesale diesel prices will fall to $0.5019 per liter from $0.5129/l, Petrobras said. Gasoline prices, meanwhile, will decrease to $0.4796/l from $0.4889/l previously. Petrobras had previously increased domestic diesel and gasoline prices on April 16 to offset rising international oil and refined product prices.

"The diesel and gasoline prices practiced by Petrobras seek balance with the international market and accompany the variations, both up and down, in refined product prices and foreign-exchange rates," Petrobras said. While international oil prices have remained solidly above $60/b in recent weeks, the Brazilian real currency gained about 4.5% against the US dollar to give Petrobras some space to make a move.

The timing of the latest price adjustment, however, will likely renew market concerns about a return to government meddling at Petrobras. While Petrobras is technically free to set domestic fuel prices, the government controls the company's board of directors. Brazil has a long history of interference in Petrobras' pricing policy, including a run in 2011-2014 that analysts estimate cost the company $20 billion-$40 billion in lost profits because it was not allowed to pass along higher oil prices to consumers at the pump.

A two-month holiday on federal fuel taxes implemented by President Jair Bolsonaro expires May 1. The tax holiday, which started March 1, was implemented as a way to partially offset a series of diesel price increases Petrobras made in the first quarter. The tax holiday is unlikely to be extended.

In addition, the price cut represents the first move under the leadership of new CEO Joaquim Silva e Luna, who took over April 19. Silva e Luna pledged to "reconcile the interests of consumers and shareholders" while also seeking "to reduce volatility without disrespecting international parity."

Bolsonaro fired former Petrobras CEO Roberto Castello Branco in February after the executive blamed the plight of independent truckers on bad roads that increased maintenance costs, not rising diesel prices. The disconnect angered Bolsonaro, who supported independent truckers during a May 2018 strike and found a key support group among the country's long-haul drivers.

But there is little concrete action Bolsonaro can take against global price volatility. Petrobras is bound to adhere to the import-parity policy via a November 2019 agreement with local antitrust regulators, which ended an investigation into predatory pricing practices by the company. The deal also forced Petrobras to sell eight of the company's 13 operated refineries in a move that will reduce the company's market share to about 50%.

Petrobras has so far agreed to sell one of the refineries, Refinaria Landulpho Alves in Bahia state, to Abu Dhabi's Mubadala Investment Co. for $1.6 billion.

Keeping domestic prices at parity with international imports will not only ensure a market for new investors in Brazil's refining segment but also third-party importers, which play an important role in Brazil's supply security, industry officials say. Brazil has historically imported about 25% of its diesel and LPG consumption, as well as about 15% of gasoline demand.

Brazil will likely need to import higher diesel volumes over the next two months amid biodiesel supply troubles. Brazil was forced to reduce the volume of biodiesel blended with diesel sold at the pump to 10% from 13% after biodiesel prices spiked at an April supply auction. The reduced blend will be valid for the May-June period.

Biodiesel represents about 13.8% of the price of a liter of diesel, according to Petrobras.

Independent truckers, however, have called for an end to the import-parity policy. The government has also discussed the creation of a fund that would ease price volatility by covering quick price oscillations rather than pass them along immediately to consumers at the pump. The idea has been broached in the past, but found little support in Congress.