Covid-19 Crisis May Crush Brazil’s Oil Boom

The coronavirus is spreading like wildfire in Brazil, and the country’s oil industry could be dragged down. “Brazil has the worst COVID growth rate of any G20 country: the pandemic is completely out of control,” wrote Raymond James in a report, explaining why it downgraded its recommendation for Petrobras to underperform.

Brazil has just surpassed the United Kingdom to become the country with the third highest number of COVID-19 cases, with over 270,000. Only the U.S. and Russia have more. Worse, the mortality rate is rising rapidly.

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

The mass graves tell a different story. But when asked about the rising death toll, he said: “So what? I’m sorry. What do you want me to do?”

The nighttime protests of “panelazos,” in which people bang pots and pans from their balconies, have become a fixture in São Paulo even before the recent surge in COVID-19 cases. The protests, which included shouts of “Bolsonaro out!” highlight the growing political danger for the president.

Bolsonaro’s 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.

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Approximately 18,000 people have already died from the virus in Brazil, and the number of cases continues to rise rapidly. The lack of widespread testing suggests that the real 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 guidance from above, nurses are dying at an alarming rate.

In this chaotic scenario, it may not be surprising that Brazil has one of the highest R numbers. 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 below 1, transmission is decreasing. Brazil had over 2, according to a May 9 article in The Lancet.

Outrage against the president is mounting. Bolsonaro is now recovering from overlapping political, economic, and health crises. To complicate matters further, Justice Minister Sergio Moro, who oversaw the wide-ranging Lava Jato investigations a few years ago, resigned at the end of April and accused President Bolsonaro of trying to fire the head of the national police to interfere in the investigations. Only the struggle with Moro could sink Bolsonaro.

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

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

Initially, Brazilian regulators suspended all scheduled oil and gas auctions for this year. Petrobras also sought to reduce production, but then reversed course amid higher demand in China.

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