Big petrol price relief coming soon for South Africans

South African motorists are set for significant relief on Wednesday as significant cuts to all grades of fuel are expected. 

This would mark the fifth consecutive month of petrol price cuts in South Africa as the rand continues to strengthen versus the dollar and global oil demand remains subdued. 

The Central Energy Fund (CEF) tracks these two factors to forecast their impact on the price of various grades of fuel for the next month. 

Its data shows significant cuts to petrol and diesel prices based on the current price of oil and the rand-dollar exchange rate. These cuts are outlined below. 

• Petrol 93 – decrease of 105 cents per litre
• Petrol 95 – decrease of 113 cents per litre
• Diesel 0.05% – decrease of 112 cents per litre
• Diesel 0.005% – decrease of 110 cents per litre

The main driver behind these cuts has been a significantly stronger rand in recent weeks due to interest rate cuts in the US, weakening the dollar, and economic stimulus being injected into the Chinese economy, strengthening the rand. 

Earlier this month, the US Federal Reserve aggressively began its interest rate-cutting cycle with a 50 basis points cut. This was followed the next day by the Reserve Bank cutting South Africa’s repo rate by 25 basis points. 

While this reflects the cautious nature of the Reserve Bank, it also widened the interest rate differential between the two countries. 

This makes South African fixed-income assets relatively more attractive to their US counterparts. As investors search for the highest risk-adjusted returns, money should flow into local assets.

As money flows into local assets, the demand for rands increases, and the currency strengthens. 

This impacts the price of petrol and diesel in South Africa by making it cheaper to import petroleum products, which are priced in US dollars. 

The rand has also been strengthened by the announcement of significant stimulus in the Chinese economy, which is set to boost consumer spending and investor confidence in the world’s second-largest economy. 

Apart from increased growth in China, this has a particularly large impact on South Africa as it is the country’s largest trading partner. 

This makes China an extremely valuable source of foreign exchange earnings for South Africa and should boost the local economy, strengthening the rand. 

While the rand strengthened remarkably in September, the price of oil remained relatively flat, decreasing by 1.86% in the month. 

This has surprised many as the price of oil usually skyrockets amid global uncertainty and conflict, as seen in the Middle East, where conflict has threatened to spiral into a regional war. 

The main reason why this typically results in higher oil prices is due to the impact a regional war in the Middle East could have on vital oil producers. 

However, this appears to be offset by lower demand for oil as developed economies slow down and fears of a US recession rise. 

Bloomberg also reported that it appears oil traders have become numb to developments in the Middle East as nearly a year of conflict has failed to impact oil output from the region. 

Importantly, there is speculation that the Organisation for Petroleum Exporting Countries (OPEC) may announce an end to its supply caps for members. 

Key members of OPEC fear that price caps, in an attempt to push oil prices higher, have resulted in them losing market share to the US. 

In particular, Saudi Arabia said it was committed to higher production as it needs the vital earnings from oil exports to boost its fiscus.