Big trouble for diesel prices in South Africa

South African motorists are set to get some relief at the petrol pumps next week, with prices forecasted to decline due to a weaker oil price and a resilient rand. 

Diesel users will not be so lucky, with prices of the fuel expected to rise significantly in August as producers grappled with a supply squeeze in the United States and Europe. 

This is largely due to widespread refinery closures on both sides of the Atlantic and a round of outages at remaining facilities, limiting the supply of diesel. 

South Africa’s Central Energy Fund (CEF) tracks these changes, alongside the rand-dollar exchange rate, to forecast the changes in the price of fuel for the coming month. 

Its latest data indicates the following changes for August –

• Petrol 93 – decrease of 28 cents per litre
• Petrol 95 – decrease of 24 cents per litre
• Diesel 0.05% – increase of 66 cents per litre
• Diesel 0.005% – increase of 65 cents per litre

The oil price has come under pressure in recent weeks as the United States appears to make progress in trade negotiations with various countries. 

Crucially, there has not been a ratcheting up of tensions with the world’s second largest economy, China, which bodes well for global trade and growth. 

Negotiations with the European Union (EU) also appear to be making some progress, with this being the second week of talks between the two economies. 

However, there is still a significant risk of 30% tariffs being imposed on most of the EU’s exports to the United States on 1 August. Despite all the progress made with China and other trading partners, a deal is yet to be signed. 

As a result, some traders are betting on declining demand for oil in the future as the uncertainty surrounding tariffs and their impact limits investment growth. 

There are also the longer-term effects of tariffs on global trade and economic growth that are leading traders to bet on declining demand, pushing down the oil prices. 

There are also significantly less supply constraints compared to earlier this year, with tensions in the Middle East appearing to have eased. 

The Organisation for Petroleum Exporting Countries (OPEC) has also increased output from some of its members, adding further supply to the market. 

While oil prices have declined slightly over the past month, diesel motorists are unlikely to feel the benefit in August as prices continue to soar for the fuel. This is largely due to tight supplies and refinery closures in the northern hemisphere. 

Diesel markets spiked last month when the fighting between Israel and Iran threatened millions of barrels of fuel exports from the Persian Gulf. That risk has now receded, but supplies remain under pressure.

Bloomberg reported that Saudi Arabia and Russia, both of which pump crude at the heavier end of the spectrum, caused the biggest OPEC+ output cuts. Meanwhile, Kazakhstan boosted the output of its very light Tengiz crude earlier this year.

Increases in OPEC oil production — set to be even faster than expected next month — should offer some support for diesel supply. Healthy refining margins should also encourage plants to run hard.

But there are also risks. Summer heat waves can pressure production, while the North Atlantic hurricane season is a potential danger for the US output of diesel and other fuels.

The rand, on the other hand, has held its own against the dollar despite continued concerns regarding the stability of the Government of National Unity (GNU) following the firing of DA Deputy Minister Andrew Whitfield. 

It has strengthened by 1.35% against the dollar over the past month, which makes the importing of oil cheaper for South Africa. 

The graph below shows the fluctuations in the basic fuel price for various fuel types in South Africa over the last month.