Big petrol price cuts expected in South Africa

South African motorists are set for substantial relief at the pumps next week, with both petrol and diesel set for sizeable price cuts.

Lower oil demand and a stronger rand have contributed to bringing down petrol prices over the past few months. 

South Africa’s Central Energy Fund (CEF) tracks the price of oil and the rand-dollar exchange rate to project what fuel prices would be if nothing changed until next month. 

Its month-end data suggests significant price reductions are on the way, further easing pressure on South African consumers and driving down inflation. 

The expected changes are outlined below –

• Petrol 93 – decrease of 86 cents per litre.
• Petrol 95 – decrease of 94 cents per litre.
• Diesel 0.05% – decrease of 76 cents per litre.
• Diesel 0.005% – decrease of 103 cents per litre.

The lower oil price throughout August is the main factor contributing to these expected cuts as demand for the commodity comes under pressure. 

In particular, an economic slowdown in the world’s largest oil importer, China, has stoked fears of declining demand. 

This has been coupled with fears of a recession in the USA, which would further drive down demand and prices. 

The Organisation for Petroleum Exporting Countries (OPEC) has begun to relax its supply cuts. It fears losing market share by withholding oil from global markets. 

Brent Crude is currently trading at $78 a barrel, with Goldman Sachs predicting it could drop as low as $60 if Chinese demand remains flat. 

However, this is unlikely to last long as lower oil prices will result in higher demand as it becomes cheaper compared to alternatives. 

Bloomberg reported that Goldman Sachs is forecasting oil to hover around $80 a barrel through 2025.

August saw a significant turnaround in the rand’s performance against the US dollar.

The month began with the rand contributing to a potential increase in fuel prices as it weakened along with other emerging market currencies during a brief market panic in early August.

Lower-than-expected job numbers raised concerns about a possible US recession, leading investors to retreat from riskier markets, which negatively affected currencies. However, stability returned, and the rand regained its footing.

The rand has benefited from improved sentiment around the Government of National Unity (GNU) and the possibility of ongoing economic reforms.

Expectations of a potential interest rate cut in the United States in August also supported the rand, although South Africa’s own move towards rate cuts has slightly offset this advantage.

This is because local rate cuts could prevent a widening interest rate gap between South Africa and the United States.

Despite this, the rand strengthened from around R18.60 during the early-August panic to approximately R17.75 by the end of the month, contributing about 9 cents per litre to a decrease in fuel prices.

However, weak economic data from China could potentially weaken the local currency in the coming months and over the long term. 

This is because China is the largest importer of South African goods, particularly minerals, and thus a vital source of foreign exchange earnings for the country.

Improved economic performance from the world’s second-largest economy tends to result in an uptick in commodity prices as it is the largest consumer of many resources. 

As a large commodity exporter, South Africa benefits from expected improvements in foreign currency earnings and economic growth boosting the rand’s value. 

China’s GDP grew by 0.7% quarter-on-quarter in the second quarter of 2024, which was significantly slower than the prior quarter’s expansion of 1.6%. This is China’s weakest growth rate since the second quarter of 2022.

This shows that the country struggles to maintain the momentum established during the year’s first three months. 

The pronounced slowdown in economic activity in the second quarter of the year has intensified concerns that Chinese economic growth could miss its target growth of 5% this year. 

The economy is currently forecast to grow by 4.8% in 2024 before moderating to 4.4% in 2025.

This is expected to have an impact on the value of the rand as Chinese demand for South African exports will be affected.