Covid-19 Crisis Could Crush Brazil’s Oil Boom

(Oilprice.com, 20.May.2020) — The coronavirus is spreading like wildfire in Brazil, and the country’s oil industry could get dragged down with it. “Brazil has the worst COVID growth rate of any G20 country: the pandemic is totally out of control,” Raymond James wrote in a report, explaining its reason for downgrading its recommendation for Petrobras to Market Underperform.

Brazil just passed the UK to become the country with the third-largest number of COVID-19 cases, at over 270,000. Only the U.S. and Russia have more. Worse, the death rate is climbing fast.

The government of President Jair Bolsonaro has aggressively opposed lockdown measures and even social distancing recommendations. Brazil is the only major country in Latin America that hasn’t had a national lockdown. Bolsonaro has downplayed the significance of the coronavirus, calling it a “little flu.” 

Mass graves tell a different story. But when he was asked about the rising number of deaths, he said, “So what? I’m sorry. What do you want me to do?”

Nightly panelaço protests, in which people bang pots and pans at their balcony windows, became a fixture in Sao Paulo even before the recent explosion in COVID-19 cases. The protests, which included chants of “Bolsonaro out!” highlight the growing political danger to the president. 

Bolsonaro’s first health minister, Luiz Henrique Mandetta, was highly popular. But after contradicting the president’s message on COVID-19, he was fired. His successor, lasted only a few weeks. “The health ministry is a ship that has lost its way,” Mandetta said on Monday. 

Roughly 18,000 people have already died from the virus in Brazil, and the number of cases continues to climb rapidly. The lack of widespread testing suggests the true number is even higher. The Wall Street Journal published a harrowing account of Brazilian nurses on the front lines. Suffering from a lack of equipment and a lack of direction from higher up, nurses are dying at an alarming rate. 

Against this chaotic backdrop, it is perhaps unsurprising that Brazil is the country with one of the highest R number. The R number refers to the reproduction number, or how many people a given infected person spreads the virus to others. If the R number is under 1, the spread is slowing. Brazil’s was over 2, according to a May 9 article in The Lancet.

Outrage with the president is on the rise. Bolsonaro is now reeling from overlapping political, economic and health crises. To complicate matters further, Justice Minister Sergio Moro, who presided over the sprawling Lava Jato investigations from a few years ago, resigned in late April and accused President Bolsonaro of trying to fire the national police chief to interfere with investigations. The fight with Moro alone could sink Bolsonaro. 

“We see no way to avoid a national lockdown, and for a lengthy period,” Raymond James said in a note. The investment bank said that Brazil’s COVID-19 response “stands out globally for its extreme dysfunction,” and the data is “stunningly bad.” 

The country’s oil industry, and especially, Petrobras, will be hit hard. Petrobras has been directly impacted by the coronavirus, with over 261 workers at the company infected, as of late April. In mid-May, the company had to withdraw workers from an offshore platform because workers had been infected. 

At first, Brazilian regulators suspended all oil and gas tenders scheduled for this year. Petrobras also sought to cut production, but then reversed course on higher demand in China. 

But Brazil cannot simply ignore the coronavirus and simply carry on as normal, as Bolsonaro prefers. With the death toll climbing at a frightening rate, the political backlash is mounting. Lockdowns appear inevitable, Raymond James says, which would “not only exacerbate pressure on Petrobras’ downstream segment, but also worsen macro conditions, with ramifications for the currency and sovereign credit rating, to which Petrobras is exposed.” 

— By Nick Cunningham for Oilprice.com

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