Tuesday, May 18, 2010

Bet on Brazilian Oil With the Real


By Win Thin

Recent Oil discoveries in Brazil could turn the nation into an oil exporting powerhouse, and savvy investors can invest in the Brazilian currency, the real (BRL), to profit from this trend.
Brazil's energy ministry announced that the recent Franco oil well find may be the "best" in Brazil's history. Franco sits about four miles below the sea floor in waters that are close to a mile-and-a-half deep.
The Brazil offshore region that has been drawing the most oil exploration runs along the country's coastline, and is called "presalt" because of the thick layer of salt that formed on top of the oil reserves.
Brazil is thought to have 50 billion barrels of oil reserves in the presalt layer, but so-called proven oil reserves are still around 12 billion barrels. Franco is estimated to hold more than 4.5 billion barrels alone, and officials are now saying that another well being drilled nearby may hold even more.
Brazil is now the 12th largest oil producer in the world, with total oil production of 2.6 million barrels a day. That is more than double the 1.2 million barrels a day of 1998. The bad news is that Brazil is the seventh largest oil consumer in the world, with consumption just about equal to domestic production.
So although it is not reliant on oil imports, Brazil is not yet a major exporter that is helped by higher prices. If these recent oil finds pan out, Brazil has the potential to become a major exporter, but for now, it remains eclipsed by Venezuela, whose proven reserves are close to 100 billion barrels and whose production of 2.5 million barrels a day is much more than domestic consumption of around 775 thousand barrels a day, making it a major oil exporter.
Lastly, we contrast Brazil's trajectory with Mexico's. Mexico's output has plunged dramatically since peaking in 2004, and if the oil sector does not see a turnaround in exploration and investment soon, it seems only a matter of time before Mexico stops being a net exporter.
For now, the Brazilian currency, the real (BRL), remains in a $1.75-$1.85 range after hitting almost $1.90 during the Greece-related emerging-market selloff. Although investors can play that range, we continue to believe that there is limited upside for the real vs. the dollar beyond $1.70, with gyrations expected due to general risk appetite.

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