Big petrol and diesel price cuts announced for South Africa

The Department of Mineral and Petroleum Resources has officially announced the changes to petrol and diesel prices for July.

These changes will see petrol prices fall by around R2 per litre and diesel prices by over R3 per litre from Wednesday, 1 July. 

This is on the back of sharply lower oil prices following peace in the Middle East and a rand that is holding its own against the dollar. 

However, the cuts have been limited to some extent by the phasing out of fuel relief measures from the National Treasury. 

The following changes were announced by the Department – 

• Petrol 93 – decrease of R2.01 per litre
• Petrol 95 – decrease of R1.96 per litre 
• Diesel 0.05% – decrease of R3.14 per litre
• Diesel 0.005% – decrease of R3.59 per litre

The cuts are not as significant as the price of oil, and the strength of the rand indicates that at the end of June. 

With the rand oil price being at its lowest levels since the war on Iran began and is below the average level of the past three years, prices at the pump should be lower. 

However, the department uses the average oil price and rand-dollar exchange rate for the previous month, smoothing out short-term fluctuations. 

This means that the department was still using a higher oil price than what the commodity is being traded for on global markets. 

Furthermore, the phasing out of fuel relief from the National Treasury reduced the size of the cuts by around R1.50 per litre. 

From 1 July onwards, the full General Fuel Levy will be recovered on fuel sales at the pump. This contributes R4.29 per litre of petrol and R4.16 per litre of diesel. 

More importantly, lower fuel prices will reduce the upward pressure on inflation and enable the Reserve Bank to avoid another interest rate hike. 

The impact of lower prices on inflation will take time as inflation data is backwards-looking, with it only likely to be seen in the reading for July, which will be released in August. 

Even then, the current rand oil price is still 20% higher than it was at the start of the year, meaning that it will still keep inflation elevated. 

However, Symmetry chief investment strategist Izak Odendaal said that it is more important to look at the structural drivers of inflation. 

The move to a lower target and the Reserve Bank’s commitment to meeting that target will bring inflation lower and interest rates down over time. 

There is no need for the Reserve Bank’s Monetary Policy Committee to to raise rates at the July meeting unless something dramatically changes the inflation outlook between now and then, Odendaal explained. 

He expects rate cuts to come early next year, and interest rates are structurally set to continue to grind lower. 

Odendaal said that achieving a 3% inflation target over time should be very positive for South African bonds and rate-sensitive equities, which remain priced as though long-term inflation will be much higher.