Petrobras Cuts Diesel Price 9.59% as Brazil Extends Fuel Subsidies

Petrobras will cut the price of road diesel sold to distributors by R$0.35 per liter from June 1, a 9.59% reduction that lowers its average refinery price from R$3.65 to R$3.30 per liter. The state-controlled oil company said the cut applies to diesel A, the pure diesel sold before biodiesel blending.

The reduction follows a new round of fuel-price measures by President Luiz Inacio Lula da Silva's government, which is trying to limit the domestic impact of higher global oil prices after the war involving the United States, Israel and Iran. Brazilian outlets reported that the conflict closed the Strait of Hormuz, a key shipping route that handled about 20% of global oil flows before the war. Petrobras had raised diesel prices in mid-March by 11.6%, or R$0.38 per liter, to R$3.65, citing higher oil prices and the gap to international benchmarks.

Why Prices Are Changing

The reduction is tied to a federal subsidy created through provisional measures, a type of executive order in Brazil that takes immediate effect but must later be approved by Congress. Petrobras said the discount should offset the reimposition of PIS and Cofins, federal social contribution taxes, on diesel from June 1.

Folha de S.Paulo reported that the government replaced the expiring tax exemption with a financial subsidy of R$0.3515 per liter for diesel A, applied to domestic producers and importers for two months through July 31. The government also authorized a broader subsidy of R$1.12 per liter for road diesel, intended to stabilize prices and supply, running from June 1 to December 31, with the Finance Ministry able to review it every two months. Valor Econômico reported the program will be fully funded by the federal government, whereas under the previous arrangement part of the cost was shared with the states and the Federal District.

The replacement mechanism works as a financial subsidy to producers and importers, with companies required to pass the lower cost through to buyers. Terra quoted Petrobras saying any further decision on the new subsidy terms would be disclosed to the Brazilian market in due course, a statement also carried by Reuters and CNN Brasil.

A Wider Fuel Package

The Lula administration, led by the Workers' Party (PT), extended several fuel measures on May 30. They include subsidies for diesel and cooking gas, along with federal tax exemptions for aviation kerosene and biodiesel. Argus Media reported that Brazil's Senate leadership had extended diesel support for June and July, combining an R$800 per cubic meter benefit with an R$320 per cubic meter subsidy already due to remain in force until December, a total equivalent to R$1.12 per liter.

Market Doubts

The price cut may not translate immediately into a uniform reduction at fuel stations. Valor Econômico quoted Marcus D'Elia, a partner at Leggio Consultoria, saying the measure mainly increases the gap between Petrobras' domestic price and import parity, the benchmark based on international prices and import costs.

Valor also quoted Sergio Araujo, president of Abicom, the Brazilian association of fuel importers, saying the measure may have limited market effect because it applies only to volumes sold by Petrobras refineries. He said roughly 30% of diesel consumed in Brazil comes from private refineries or imports. Importers are also uncertain about joining the subsidy program; Araujo told Valor that companies were still waiting for payments from the first subsidy period in March, creating cash-flow pressure.

StoneX analyst Bruno Cordeiro told Valor that, before the announcement, Petrobras' diesel price was R$0.97 per liter, or 26.7%, below importers' prices. He said the final gap will depend partly on how many importers decide to participate in the government program.

For consumers, the diesel measure is designed to prevent a renewed rise in transport costs at a politically sensitive moment, since diesel prices feed directly into freight costs in Brazil, where much of the country's cargo moves by road. But the policy also shifts more of the burden to the federal budget, extending a subsidy model created to absorb the domestic impact of a global energy shock.