Price Controls Deal a Damaging Blow to Petrobras

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Shares of Petrobras (NYSE:PBR) fell as much as 12 percent on the New York Stock Exchange on Monday after the state-controlled oil and gas company reported an underwhelming fuel price increase. Petrobras has lost more than 30 billion Brazilian reais ($12.77 billion) over the past two years because it has resisted increasing fuel prices in an effort to fight domestic inflation, which is currently running at about 5.8 percent compared to a target rate of 4.5 percent.

The Brazilian government controls a voting majority in the company, and the nation’s finance minister serves as chair of the company’s board of directors. The state has kept fuel prices low over the past few years despite the fact that oil prices have doubled since hitting a trough below $50 a barrel in the wake of the 2008 financial crisis. This policy, although a firm strategy in the face of rampant inflation, has eroded the oil company’s earnings because the firm has essentially been selling fuel at a discount.

A price increase has been a long time coming, but it needed to satisfy certain conditions in order to justify the bullish thesis outlined by analysts at banks like Credit Suisse. Credit Suisse analyst Vinicius Canheu has previously upgraded the stock in part on the expectation that the government would ease up price controls. The price increases announced at the end of November, though, didn’t appear to get the job done.

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