It was not supposed to be this way. Back in 2006 when the first Brazilian pre-salt oil discovery was made, then-President Luiz Inacio Lula da Silva said his country’s new found oil largess would be a second independence for Latin America’s second-largest economy.
It was thought that oil giants the world over would race to Brazil to get a slice of what was the largest discovery in the Americas in more than three decades. Expectations were that Brazil would become the world’s next great non-OPEC producer and that Petrobras (NYSE: PBR), the country’s state-run oil company, would be Latin America’s Exxon Mobil (NYSE: XOM) or Royal Dutch Shell (NYSE: RDS-A).
And for those that did not want to make a single-stock bet on Petrobras, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) was supposed to be the way to get some exposure to Brazil’s status as a rising oil power. [LatAm ETFs Look to Bounce Back]
Fast-forward to 2014, and the ebullience surrounding Petrobras, EWZ and arguably, Brazil’s oil industry at large, is long gone. Remember when President Obama roiled political opponents when he said he wanted the U.S. to become one of Brazil’s best oil customers? The opposite has come to pass.
To be clear, Brazil does not need to import much oil. However, the state of the country’s refinery system is decrepit. Existing refineries are operating at capacity and new refineries are years from coming online.
“A rising share of the nation’s gasoline and diesel comes from shale oil in Texas, Oklahoma and the Dakotas that is refined on the U.S. Gulf Coast,” Reuters reported. “Brazil imported some 530,000 barrels per day (bpd) of refined fuels through November 30, nearly double the levels of 2007.”
Government price controls that prohibit Petrobras from raising local gasoline prices have hampered the country’s refining business, shares of Petrobras and EWZ. Two Petrobras securities combine for 10.4% of the ETF’s weight, making it the largest holding in the largest Brazil ETF.
After a year in which it ranked as one of the 10 worst ETFs in terms of outflows, EWZ ranks among the 10 worst non-leveraged ETFs in terms of performance to start 2014. [Emerging Markets ETFs Refuse to Bounce Back]
In the past year, shares of Petrobras have plunged almost 36% while EWZ is flirting with a loss of almost 30%. Over the same time, the Energy Select Sector SPDR (NYSEArca: XLE) and the iShares Global Energy ETF (NYSEArca: IXC) have traded higher.
Traders see more downside ahead for EWZ. On Tuesday, “we saw buyers of February 39 puts in EWZ, which are out of the money given EWZ trading around the $42 level at the time, but still a realistic strike given the volatility and general selling pressure we have been accustomed to seeing in this particular product,” according to Street One Financial. [Down and Out in Rio]
Betting on Petrobras to ameliorate the situation for EWZ appears dicey. Petrobras’ indebtedness is the highest among the world’s major oil companies, according to Thomson Reuters data.
EWZ, Petrobras 1-Year Performance Against XLE, IXC
