Petrobras Gains as Citigroup Says Real to Lower Price Gap

Petroleo Brasileiro SA, Brazil’s state-run oil producer, advanced the most in a month after Citigroup Inc. said the company could beat peers as lower oil prices and a stronger real cut losses on imported fuel sales.

Shares of Petrobras, as the company is known, gained 4.3 percent to 18.15 reais at the close of trading in Sao Paulo, the most since March 7. It was the biggest contributor to the 1.3 percent advance in the 53-member MSCI Emerging Markets/Energy Index. The benchmark Bovespa index rose 1.5 percent.

Recent weakness in oil prices and a stronger real have reduced the gap between international gasoline and diesel prices and those in Brazil, Citigroup analysts Pedro Medeiros and Fernando Valle wrote yesterday in a note to clients. The company sells imported diesel at a discount in the domestic market, as part of government policy set to curb inflation. The cost of fuel imports last year helped send Petrobras profits to the lowest since 2004.

“Petrobras is one of Brazil’s most levered names to appreciation of the Brazilian real,” the analysts wrote. The company “benefits from higher fuel price margins on imports, since fuel prices are set in domestic currency,” they wrote.

Petrobras should gain if the exchange rate stays below 2 per dollar for the next 12 months, the analysts wrote. The currency rose 0.5 percent to 1.9812 per dollar today, extending this year’s gain to 3.6 percent.

Refining Capacity

Crude oil futures fell 4.7 percent in New York last week, the most in six months. Today oil rose 0.9 percent to $94.20 a barrel in New York.

The state-run oil producer has increased money-losing gasoline imports as refining output in Brazil fails to keep up with surging consumption. President Dilma Rousseff has prevented the company from raising fuel prices as inflation remained above the midpoint of the central bank’s target range since September 2010. The country was self-sufficient in gasoline supplies until 2009.

Chief Executive Officer Maria das Gracas Foster said today at an event in Rio de Janeiro that the weaker real has exacerbated losses on imports. Petrobras is aware of the impact fuel prices have on inflation, she said.

While the government has approved two fuel-price increases this year, the Citigroup analysts see room for an additional 5 percent boost to pre-tax refinery-gate diesel prices.

“This increase would be enough to get the company’s refining unit to break even under current oil prices,” they wrote. There is a lesser chance of a “minor” increase in gasoline prices of 2 percent to 3 percent, according to the analysts.

The international diesel price is currently about 1.558 reais per liter, according to Citigroup’s research. The Brazilian price is about 7.2 percent lower at 1.445 reais per liter, the analysts wrote.

Petrobras shares jumped on March 6 after the government unexpectedly approved a 5 percent increase in diesel prices. Shares are down 7 percent this year, while the Bovespa has dropped 8.3 percent.

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