Bad news for petrol prices in South Africa

Petrol and diesel prices are expected to rise at the pumps next month, with the Israel-Iran conflict pushing oil prices higher and weakening the rand. 

Although the impact of the conflict on oil and the rand was relatively short-lived, the swings were enough to push the average exchange rate and oil price for the month higher. 

As a result, when the averages are used, South African motorists are set for some pain at the pumps when the official changes are announced before 2 July. 

The Central Energy Fund tracks the international price of oil and the rand-dollar exchange rate to forecast the expected changes to the prices of petrol and diesel. 

Its latest data indicates the following changes –

• Petrol 93 – increase by 50 cents per litre
• Petrol 95 – increase by 53 cents per litre
• Diesel 0.05% – increase by 82 cents per litre
• Diesel 0.005% – increase by 84 cents per litre

Israeli strikes on Iran earlier in the month sent the oil price surging, with Brent Crude rising by as much as 13% in the aftermath.

This was the biggest daily gain in the oil price since Russia’s invasion of Ukraine, which resulted in sharp increases in fuel prices around the world and significantly higher inflation.

Traders feared a potential disruption to oil supply from the Middle East and the increased possibility of the closure of the crucial Strait of Hormuz, through which over a quarter of global oil flows. 

Iran has repeatedly threatened to close this strait in retaliation for strikes against its military installations, spooking oil traders.

However, after a US-brokered ceasefire on 23 June, it became clear that the conflict had little impact on the global oil trade.

Supply from the region has actually increased year-on-year due to the Organisation of Petroleum Exporting Countries (OPEC) easing supply restrictions on its members. 

This undid most of the rise in the price of oil, with it quickly returning to levels seen before the conflict and has since traded at around $68 per barrel. 

A similar passage of events played out with the rand over the same period, with the currency weakening sharply amid the conflict before strengthening following the ceasefire. 

The currency continues to hold its own and has actually gained ground on the dollar over the past month by around 0.5%. 

This has somewhat limited the potential increase in fuel prices at the pumps in July, but it was not enough to offset the increases to a meaningful degree. 

The higher fuel price is likely to have some impact on inflation, but should not translate into any dramatic movements. The price of oil in rands remains around 7% below its level a year ago. 

Apart from that, the Reserve Bank prefers to ‘look through’ these short-term shocks to better understand the longer-term second-round impact on other goods and services.

Oil prices have a lower impact on inflation than in the past due to the rise of alternative energy sources in the production of goods and services.

The graph below shows the Basic Fuel Price in cents, revealing the impact of the short-term spike in oil prices and a weaker rand.