Brazil energy index
Energy (XLE) and crude oil (USO) (UWTI) (BNO) products were key elements of the Brazilian economy. As there has been a heavy fall in crude oil and commodity prices since mid-2014 due to oversupply concerns and a demand slowdown, the Brazilian economy started its contraction.
Brazil’s commodity exports have also suffered due to the slowdown in China (FXI) (YINN). Brazil’s growth model has largely been export-driven, with commodities (DBC) such as iron ore and crude oil among its top exports.
Many commodity producers such as Vale (VALE), Gerdau (GGB), Petrobras (PBS), and Companhia Siderúrgica Nacional (SID) incurred massive losses due to a fall in commodity prices and political instability in the country.
Effect of energy index in the economy
From the above chart, we can see that the Brazilian index closely followed the movement of its energy index. The mid-February 2016 recovery in Brazil (EWZ) is also correlated with the recovery in Brazil’s energy index. This clearly indicates that the economy has been highly dependent on the movement of commodities.
However, crude oil prices are slowly sliding in a southward direction. However, Brazil’s index continues its upward direction.
If Brazil’s growth model changes from a commodity-driven economy to a service-oriented economy, then the fluctuation in commodity prices should not heavily affect the economy. Brazil’s economy is slowly transitioning toward a service-based economy.
In the next part of this series, we’ll analyze how Brazil’s IT sector correlated to its economy.