New fuel policy in Brazil to ease prices at the pump, space out adjustments
(Reuters) - Brazilian state oil company Petrobras approved a new fuel pricing policy for gasoline and diesel that will sharply lower costs for motorists, it announced on Tuesday, ditching a more market-based policy in favor of greater flexibility to smooth price swings.
President Luiz Inacio Lula da Silva celebrated the new policy for Brazil's millions of motorists in a post on social media later Tuesday, declaring it "a victory for the people."
The new pricing system scraps a so-called fuel import parity policy that more closely aligned prices at the pump with the oil market and exchange rates. Lula, as the leftist leader is known, had promised to change that to make fuel cheaper.
Under the new Petrobras pricing strategy, gasoline and diesel prices will fall nearly 13% starting on Wednesday, while prices for liquefied petroleum gas (LPG), used widely for heating and cooking, will drop more than 21%, according to a company filing.
Even so, Petrobras shares rose as much as 5% after the announcement before ending up 2.5%, making it one of the day's top gainers on Brazil's main stock index.
In a research note, JPMorgan described the reworked pricing policy as "more friendly than investors expected."
A company source touted the ability to space out future price adjustments over a longer period, with raises or further reductions most likely coming annually or twice a year.
The source, who spoke to Reuters on condition of anonymity, said Petrobras executives believe longer periods without adjustments will not cause losses, because market downturns and profitable stretches should even out over time.
Chief Executive Jean Paul Prates, tapped by Lula to lead Petrobras in January, told CNN Brasil the company will still adjust prices based on market factors. But he also emphasized price tweaks will be rolled out more slowly, compared to especially volatile swings under the old policy in 2021 and 2022.
"We'll certainly have more defenses against volatility than before."
Profits still expected
Prates told reporters on Tuesday that the new pricing framework for consumers in Latin America's biggest economy will still safeguard the state-run company's bottom line because fuel prices will not dip "below profitability."
Mines and Energy Minister Alexandre Silveira echoed the sentiment.
"By no means will Petrobras cease to be attractive to investors," he said.
The policy shift will be tested when oil prices rise and apply upward pressure on what consumers can expect to pay for motor fuels or LPG.
"There was room to give this price reduction," said Pedro Rodrigues, an oil expert at the CBIE consultancy, citing falling crude oil prices over recent months.
He noted that Petrobras needs to import fuels at market prices to meet domestic demand, and the company could incur steep losses if higher crude prices in the future are not passed on to consumers.
"After the price starts to rise, what happens?" he asked.
Another test will most likely come later this year, when diesel prices normally rise due in part to increased demand in the Northern Hemisphere winter, said Pedro Shinzato, a StoneX analyst.
Petrobras' new pricing policy also came under criticism from some as too opaque.
"The announcement was very confusing," said Adriano Pires, a one-time pick by ex-President Jair Bolsonaro to lead Petrobras even though he never took office. "Transparency in price-setting is over."
The previous pricing policy was adopted seven years ago by conservative former President Michel Temer. Bolsonaro, his far-right populist successor, maintained it although he criticized the model when prices rose.
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