Big petrol price cuts expected next month

South African motorists are set for further relief, with data indicating there will be a fourth consecutive month of petrol price cuts in September. 

The Central Energy Fund (CEF), which tracks the price of oil and the dollar-rand exchange rate to forecast fuel prices in the future, expects there to be a significant overrecovery in the prices of petrol and diesel. 

This is largely due to a decline in oil prices as fears of an economic slowdown in the US temper demand. 

Declining oil prices have been partially offset by a stronger dollar as global uncertainty results in investors turning to the US dollar for safety, strengthening the greenback. 

Data from the CEF indicates the following price changes will take effect next month if nothing changes –

• Petrol 93 – decrease of 64 cents per litre 
• Petrol 95 – decrease of 68 cents per litre
• Diesel (0.05%) – decrease of 59 cents per litre
• Diesel (0.005%) – decrease of 81 cents per litre

This will extend the relief felt by South African motorists over the past few months, where fuel prices saw successive declines. 

These successive declines have resulted in motorists paying R2.44 less per litre of 93-octane petrol and R1.77 less per litre of 0.05% sulphur diesel. 

The expected decrease in fuel prices last month, based on the CEF’s calculations, is not guaranteed. Changes to the price of oil and relative rand strength or weakness will affect the announced prices at the end of the month. 

In particular, while the oil price has trended downwards, it remains highly volatile. Fears of an Iranian attack on Israel sent oil soaring above $80 per barrel yesterday. 

However, this might be outweighed by fears of a recession in the world’s largest economy and slower-than-expected growth in China. 

The Organisation for Petroleum Exporting Countries (OPEC) trimmed its forecast for global oil demand this year and next on fears of a global economic slowdown. OPEC kept its supply caps in force. 

The rand has been swept up by volatility in global financial markets, with its value experiencing wild swings over the past few weeks. 

Investec chief economist Annabel Bishop expects this volatility to subside and the rand to begin trading more steadily around R18.20 to the dollar. 

This is slightly stronger than the level of R18.65/$, which the currency reached last week on the back of rising risk aversion from investors. 

Emerging market currencies, such as the rand, are highly susceptible to global shocks. Investors turn to the dollar as a safe haven during volatile periods, strengthening the greenback versus other currencies. 

Over the past few weeks, another factor in a weaker rand has been weak economic data out of China. As the largest export destination for South African goods, this significantly impacts foreign exchange earnings and economic activity in the country. 

Bishop said the local currency is fundamentally stronger following South Africa’s national elections and the formation of the Government of National Unity (GNU). 

However, it remains highly vulnerable to external shocks, and a US recession could further weaken investors’ appetite for risk. 

Furthermore, indications that the Monetary Policy Committee (MPC) of the Reserve Bank will begin its cutting cycle next month have weakened the currency. 

Suppose South Africa’s interest rates decline earlier and faster than those in developed markets, particularly the US. In that case, capital will flow out of rand-based assets to markets where the risk-adjusted return is advantageous. 

This is unlikely to materialise as the US Federal Reserve is also likely to begin cutting rates in September due to weak economic data.