Brazil offers support to US

By Rudy Martin | Mar. 26, 2009

The first visit between US President Obama and Brazil's President Lula highlights Brazil's emerging role as a regional economic and political power. While the timing of any joint initiatives will have to wait until after the upcoming G-20 meeting, it's clear Brazil can be a resource for the US to manage through the upcoming energy changes. Here are some investing ideas that have gotten buried in all the excitement about the credit crunch.

PetroBras (NYSE:PBR), Cosan (NYSE:CZZ)

The recent Washington meeting between Brazil’s President Lula and US President Obama illustrates Brazil’s rising economic and diplomatic powers. It also came one day after the International Energy Agency warned of a massive fall in Mexico’s Cantarell Oil Field in 2009, years ahead of what anyone would have previously forecast. If the slide continues, it will put Mexico’s economy at risk and strip the U.S. of a traditional source of crude imports within five years. It will also provide a major opportunity for Brazil to become a more significant US energy trade partner.

Mexico and Venezuela are reducing oil exports to the US.

The five largest sources of US petroleum import in 2008 were Canada, Saudia Arabia, Mexico, Venezuela and Nigeria. In effect two Latin countries combined provided almost as much oil to the US as Canada did last year.

While Mexico’s proximity and closeness to the US via NAFTA assure a continuing supply, the amounts of petroleum products are likely to be lower as production dwindles.

Mexican oil production fell 9.2% last year and is down 21% from peak levels in 2004. Last year, Mexico slipped to seventh place in the EIA's global production ranking from sixth in 2007.

State oil monopoly Petroleos Mexicanos continues to miss it’s own optimistic production targets. The most recent Mexican output data for January painted a bleak picture - crude output slipped to a 13-year low of 2.69 million barrels a day, below Pemex's target for the year.

From Mexico’s perspective, changing into a net oil importer would have important repercussions upon the economy, due to the dependence of the federal government on Pemex for a sizable share of its revenues.

Further south, Venezuela is gradually diversifying exports away from a dependence on the US. While potential reserves numbers in Venezuela are up due to the inclusion of shale and heavier crude oils, the prices required for developing these findings are also up. In the meantime, real production is dropping in response to problems with exploration and development contracts, union issues and gradually aging operating fields.

The situation is very different in Brazil.

It has higher reserves. Brazil had 12.2 billion barrels of proven oil reserves in 2008, second-largest in South America after Venezuela. The offshore Campos and Santos Basins, located on the country’s southeast coast, contain the vast majority of Brazil’s proven reserves. Recent deep-water discoveries have made further increased Brazil’s ability to quickly deliver affordable oil flows.

It is setting production records. In 2008, Brazil produced 2.4 million barrels per day (bbl/d) of oil, of which 77 percent was crude oil. Brazil’s oil production has risen steadily in recent years and is estimated to rise to 2.7 bbl/d in 2009. In February, Petrobras (NYSE:PBR) set a new monthly production record (1,940,000 bpd), surpassing the previous mark (1,923,000 bpd), set in January 2009, by 17,000 bpd.

It is most likely to become a net oil exporter of crude in 2009. The bulk of all new Brazilian cars are flex-fuel that use 85% ethanol. The high use of renewable energy for transportation is a long-term benefit of Brazil's drive to reduce oil dependence.

It has many other differences. Most notably Brazil has the ability to attract new capital to develop its fields. Unlike the other two countries, Brazil has a history of attracting new capital for oil development, working with partners and is not dependent on the oil industry for the bulk of its government revenues. This allows for greater reinvestment in the future.

Higher reserves, high production, a greater focus on exports and a politically popular and stable government. This recipe favors Brazil as a trade partner and eventually investors will see this too.

General News

• Central bank Interest rates continue to drop. Mexico’s central bank cut its benchmark lending rate more than economists expected as the prospect of a deeper economic slump in Latin America’s second- biggest economy outweighed inflation concerns. This follows similar actions in other Latin countries. Chile’s central bank has cut its benchmark rate 600 basis points to 2.25 percent this year, while Brazil has cut its Selic benchmark rate to 11.25 percent from 13.75 percent.

• Growth programs are in the works. Brazilian President Luiz Inacio Lula da Silva’s administration wants to expand the housing stock for low-income families by about 1 million homes. The government is considering measures including direct subsidies and reduced down payment requirements. According to Brazilian papers, the new measure will include new investments of at least $12.3 billion in order to build an estimated total of one million new homes -- 400 thousand for very poor families (with a 100% subsidy), 400 thousand for low income class families (with some degree of subsidy) and 200 thousand for middle class families, without subsidy.

• Latin stocks are responding positively. The average stock in the Latin Stock Beat Index rose 3.1% over the last five trading sessions and is now up 8.8% over the last 30 days. Material stocks such as Vale (NYSE:RIO) up 13% are among the leaders. The worst performer was the airline stocks GOL (NYSE:GOL) with a 12% drop over the last five days.