Petrobras Plunge on Gasoline Price Sinks Brazil’s Sovereign Fund in April

Brazil’s refusal to allow higher gasoline prices is cutting into returns of its sovereign wealth fund, whose main holdings are shares of state-controlled Petroleo Brasileiro SA. (PETR4)

The fund, set up in December 2008 with 14.3 billion reais ($9.1 billion) in capital, lost 7.4 percent from the end of March through April 20, marking the biggest monthly decline since October, data from Brazil’s regulator show. Petrobras voting shares, which account for about 57 percent of the fund’s assets, fell 9.6 percent in the period, while preferred shares that make up 23 percent of total assets dropped 7.8 percent.

The government is pressuring Petrobras to keep fuel prices steady as policy makers try to contain the fastest inflation since 2008, said Felipe Salto, an analyst at research group Tendencias Consultoria Integrada in Sao Paulo. The company hasn’t changed gasoline prices since mid-2009, cutting into profits even as crude oil climbed 61 percent on the New York Mercantile Exchange through last week.

“Society had to benefit in some way from the fact that Petrobras is owned by the state,” Salto said in a phone interview. “The benefit is to avoid a fuel price increase in a moment of accelerating inflation, even if this affects the company’s shares or the sovereign fund.”

Fundo Fiscal de Investimento e Estabilizacao, created with the aim of building up savings and providing a cushion against outside shocks, has gained 28 percent since its inception. In addition to Petrobras, the fund holds shares of state-controlled Banco do Brasil SA, which account for 9 percent of assets. The remaining 11 percent is composed of Brazilian government bonds.

Raising Capital
Unlike wealth funds in countries from Singapore to Norway, Brazil’s isn’t financed with budget surpluses as the country runs a deficit. Instead, the government issued local bonds to raise the initial capital. The government hasn’t made contributions or taken withdrawals since starting the fund.

Petrobras Chief Executive Officer Jose Sergio Gabrielli said April 12 that Brazil’s gasoline prices must go up if oil prices remain high. Two days later, Finance Minister Guido Mantega said in an interview in Washington the company wouldn’t raise gasoline prices in the “short-term.”

Consumer prices rose 6.44 percent in the 12 months through mid-April, approaching the 6.5 percent upper limit of the central bank’s target.

“Fuel prices have to rise,” Nelson Rodrigues de Matos, an analyst at Banco do Brasil, said in a telephone interview from Rio de Janeiro. “Petrobras’s CEO says that if oil prices stay near current levels, domestic prices have to go up. Then the Finance Ministry says there’s no need for an increase. That’s probably why investors are concerned about the company.”

Producer Rally
A Finance Ministry press official declined to comment in an e-mailed statement.

The lost revenue is causing Petrobras shares to miss out on a rally by crude producers worldwide. Irving, Texas-based Exxon Mobil Corp., the largest U.S. oil producer, soared 18 percent this year through last week, while Europe’s biggest, Royal Dutch Shell Plc, added 4 percent. PetroChina Co., the nation’s largest oil company, advanced 6 percent. The Brazilian producer’s preferred shares, the most traded, dropped 3.7 percent in that period.

Petrobras preferred shares dropped 0.6 percent to 26.02 reais in Sao Paulo trading at 9:47 a.m. New York time, near a four-month low.

Oil reached a 31-month high of $113.48 in New York yesterday.