Brazil mulls fuel price hike after 2-1/2 years

RIO DE JANEIRO, April 29 (Reuters) - Brazil's government will decide on a possible hike in gasoline and diesel prices on Tuesday, which would be the first raise since 2005 and a much-needed revenue boost for state oil company Petrobras.

Energy Minister Edison Lobao will meet with President Luiz Inacio Lula da Silva to discuss fuel prices in the evening, a ministry spokesman said.

Last week, Lula acknowledged gasoline prices lagged behind international rates as they had not been adjusted since oil cost $30 a barrel in 2005. Still, he said inflationary impact of a price hike would have to be discussed first.

Crude oil prices have this week rallied to records near $120 per barrel.

Analysts say the price lag for gasoline and diesel is more than 20 percent, which is affecting Petrobras margins. Still, it is smaller than the difference between oil prices in 2005 and now thanks to the strength of Brazil's currency against the dollar and a 25 percent ethanol mix in Brazilian gasoline.

Although Petrobras (PETR4.SA)(PBR.N), which is a publicly traded company, is formally free to set fuel prices, the government has a de facto control over the prices of gasoline, diesel fuel and cooking gas.

The prices of other oil products like aviation kerosene, fuel oil or naphtha, are adjusted regularly and are in line with market levels.

The ministry spokesman said Petrobras would probably evaluate a government recommendation and announce its decision later. "Technically fuel prices are free, so it is Petrobras that decides on whether to raise them or not," he said.

Analysts say the government is only likely to reduce the lag by less than half, and probably only for gasoline and not for diesel, to prevent a spike in inflation, which is rearing its head, spurred by rising demand and food prices.

"Inflation or no inflation, there has to be a hike, they don't have much choice. The growing lag is affecting Petrobras margins. I don't believe in an increase of more than 10 percent, now with a five-percent rise the market would at least be less unhappy," said Luiz Otavio Nunes, an analyst with Agora brokerage.

Petrobras needs healthy cash flows to fund its ambitious oil exploration program, especially in the newly-found reserves deep under the ocean floor in the so-called subsalt cluster.

Its stock has benefited from recent discoveries but may take a blow if the company has to sponsor the government's fight against inflation at the cost of own development.

An analyst with Banco do Brasil Investimentos, Nelson Rodrigues de Matos, said too small a fuel price hike may negatively affect Petobras stocks.

"The market may be unhappy if it's just five percent that people are talking about," he said.

Banif brokerage said in a report this week a 5-7 percent rise in diesel and gasoline would mean between 5 billion reais ($2.9 billion) and 6 billion reais in annual revenues for the company. By comparison, Petrobras' five-year investment plan envisages a capital expenditure of $122 billion. (Reporting by Andrei Khalip and Denise Luna; Editing by Marguerita Choy)