Energy

Bad news for petrol prices in South Africa

Petrol price

Petrol and diesel prices will likely increase next month as oil demand rises in the United States, driving its price. However, a strong rand may save the day.

South Africans have enjoyed two consecutive months of fuel price cuts, with petrol coming down over R2 per litre and diesel prices coming down just below R1 per litre. 

However, this relief is unlikely to last long as demand for oil picks up, and major producers limit their supply to keep prices elevated. 

Investec chief economist Annabel Bishop noted that the Brent crude oil price has risen above $87 per barrel this month (R1,587/barrel), higher than June’s average of US$82.9/barrel (R1,523/bbl). 

Bishop explained that this was due to expectations of higher demand and supply concerns resulting from rising tensions in the Middle East. 

In the US, the summer driving season exerts significant demand on fuel – driving up the price of the commodity. 

As this trend continues across the Northern Hemisphere, Bishop expects oil prices to remain elevated. 

The EIA (US Energy Information Administration) noted a larger-than-expected drawdown on US oil inventories, which added to price pressure in recent weeks. 

US banks, including Goldman Sachs, expect global oil consumption to exceed supply, pulling stockpiles lower and supporting prices.

Tight supply has also had an impact on oil prices as the Organisation for Petroleum Exporting Countries (OPEC) keeps its supply caps in place 

The EIA said the extension of voluntary OPEC+ production cuts will continue to fall global oil inventories throughout the rest of the year and into 2025, maintaining upward pressure on oil prices. 

This may lead to inflation remaining sticky and, thus, preventing the Reserve Bank from cutting interest rates later this year.

The first graph below shows the oil price in dollars and rands, while the second shows the impact of rand weakness on the petrol price charged at the pump. 

Rand may save motorists

There is good news that may cancel out any increases to the price of petrol from rising oil prices – a stronger rand. 

The rand is trading near R18.20/$, and Bishop forecasts it to average R18.00/$ this quarter. It will likely see some sustained strength towards September as the US leans towards cutting interest rates.   

A stronger rand over 2025 should counteract some lift in South Africa’s oil price, although much will depend on the timing and speed of US interest rate cuts.

As the rand strengthens, it becomes relatively cheaper for South Africa to import oil and other petroleum products, pushing prices down. 

The positive atmosphere surrounding the formation of a Government of National Unity (GNU) has strengthened the rand significantly, even dipping below R18/$ for the first time in ten months. 

However, this has not been sustained. Following the election, the currency experienced significant swings in its value, blowing out above R18.50/$ at some points. 

The relative strength of the rand is highly dependent on whether South Africa’s new government can deliver on its promise to enhance economic outcomes. 

Efficient Group chief economist Dawie Roodt told Daily Investor that there are two likely outcomes for the rand. 

If the GNU can perform and show true reform of the country, the rand can easily appreciate and return to R17/USD  in the short term. 

In the medium to long term, Roodt expects the currency to gradually depreciate, at roughly 2% to 3% annually against the US dollar. 

In the longer term, assuming the GNU “does all the right things,” South Africans could expect the rand to continue gradually depreciating against the US dollar at around 3%.

Roodt’s second outcome is a bad scenario in which the GNU succumbs to political hurdles and collapses, and another political formation takes over in South Africa. 

This would see the rand plummet, and the currency would soon exceed R20/USD, even reaching R22/USD.

Such a plunge in value would significantly increase the cost of importing oil into South Africa and, thus, push petrol prices higher. 

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