Bad news about petrol prices in South Africa

Petrol prices in August are set to reverse their downward trend as the dollar strengthens, increasing the cost of importing oil into South Africa.

This is set to be counteracted somewhat by declining Chinese demand for oil, which will lower the price of the commodity. 

The latest data from the Central Energy Fund indicates that petrol prices may fall slightly in August, by between 4 cents and 7 cents per litre. 

Diesel prices are expected to remain flat or rise by 13 cents per litre next month, depending on the grade. 

While this is a mixed bag, with prices decreasing slightly, it indicates that the downward trend in petrol prices in June and July may end in August. 

The main reason behind this shift is the strengthening dollar, making importing oil into South Africa more costly. 

The oil price has remained relatively flat over the past few months and has actually declined in the past few days. 

Brent crude has dropped towards $84 per barrel despite production cuts from some of the world’s largest producers. 

This would typically lead to a lower price at the pump in South Africa. However, the dollar has strengthened markedly this week, offsetting any oil price declines. 

The rand has been strengthening since the end of April, reaching R17.95/$ at the end of last week.

However, it has since weakened due to some risk aversion following the attempted assassination of ex-US President Donald Trump.

This attempted assassination decreases investors’ risk tolerance by fueling uncertainty and market volatility, resulting in investors dumping emerging market assets such as the rand. 

During these periods, investors turn to the dollar and US-based assets as a safe haven. The country has the world’s deepest capital markets and is the global reserve currency, which results in the dollar appreciating relative to its peers. 

The graph below shows the effect of a weak rand on the price of fuel in South Africa.

The events in the US that sparked uncertainty, weakening the rand and strengthening the dollar, have been coupled with weak economic data coming out of China. 

China’s economy posted an annual growth of only 4.7% for the second quarter of 2024, much weaker than the expected 5.1%. 

This will bring down the price of oil globally as China is the largest importer of the commodity, and a slowing economy indicates decreased demand. 

While this should help reduce petrol prices in South Africa, a slowing Chinese economy is bad news for the country’s economy. 

China is the single largest export market for South African products, particularly mineral resources, which makes the local economy highly vulnerable to shocks from the East Asian giant. 

A weaker Chinese economy will result in fewer exports from South Africa and less foreign exchange flowing into the country, weakening the rand. 

This will compound the effect of a stronger dollar, making South Africa’s oil imports more expensive. 

This is likely to negatively impact the projected price of fuel in the country over the rest of July and result in South African motorists paying more to fill up their tanks in August. 

Oil prices are also unlikely to remain weak for long, with US banks projecting an uptick in demand from the world’s largest economy in the coming months. 

The Organisation for Petroleum Exporting Countries (OPEC) is also expected to keep supply tight, maintaining its production caps to support prices. 

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. 

The price of oil in dollars compared to its price in rands is shown in the graph below.