Trouble for petrol price cuts next month

South African motorists can expect further petrol price relief in November, with all grades of fuel currently expected to decline. 

However, rising tensions in the Middle East threaten this picture as traders bet the price of oil will rise as supply is at risk of being disrupted by a regional war. 

While the start of the month is far too early to make a definitive call on how pricing will end up, it does give a clear indication of how things are starting out.

For instance, global petroleum prices would have to surge significantly to push the recoveries into under-recovery territory, and this would have to go alongside a crash in the rand.

The expected changes, according to data from the Central Energy Fund (CEF), to the price of petrol and diesel next month are shown below. 

• Petrol 93 – decrease of 83 cents per litre
• Petrol 95 – decrease of 80 cents per litre
• Diesel 0.05% – decrease of 77 cents per litre
• Diesel 0.005% – decrease of 77 cents per litre

These changes show that while the rise in oil prices has increased the basic fuel price in South Africa, it is still below the average cost for September. 

The oil price has risen 8.18% in the past five days to $77 per barrel. However, it has decreased by 14% over the past six months. 

This is indicative of an underlying trend of declining oil demand as developed economies slow down, particularly the US and China. 

Furthermore, the oil production caps imposed by the Organisation for Petroleum Exporting Countries (OPEC) are set to be lifted towards the end of the year. 

This is due to large producers, such as Saudi Arabia, fearing they are losing market share by limiting their output. 

As a result, supply constraints are set to ease, which, along with lower demand, should push down the price of oil. 

Bloomberg data has also shown that the conflict in the Middle East is yet to tangibly impact the export of oil from the region. 

Therefore, many traders are suspicious that the latest round of increased tension will result in supply disruptions. 

Iran’s attack on Israel has raised fears over an all-out war in the Middle East and prompted a flurry of action in the options market. 

A war between Israel and Iran will significantly disrupt global oil markets, with Iran exporting over a million barrels a day, mainly to China. Israel has not ruled out an attack on the country’s oil facilities.

Still, questions about the demand outlook – especially from the largest importer, China – and oversupply continue to hang over the market.

A similar story has played out regarding the rand-dollar exchange rate, with the local currency coming under pressure early in October. 

However, it remains stronger than it was during the majority of September, as the US Federal Reserve aggressively began cutting interest rates at the end of the month. 

The Fed entered its interest rate-cutting cycle last month with a 50 basis point cut. Typically, when the Fed cuts rates, the dollar weakens. 

A day after the Fed cut rates, the Reserve Bank followed with a 25 basis point cut, widening the interest rate differential between the two countries. 

As a result, South African fixed-income assets are now relatively more attractive than their US counterparts as they offer a higher risk-adjusted rate of return. 

This differential will likely widen further as the US cuts again in November and December, while South Africa’s MPC has only one meeting left this year, which will take place in November.

Investec chief economist Annabel Bishop expects the differential to be another 25 basis points wider by the end of 2024, supporting the rand versus the dollar. 

Chinese stimulus has also boosted the rand in recent weeks. It is expected to drive increased demand for South Africa’s commodity exports, bolstering foreign exchange earnings. 

More supportive stimulus measures are expected to follow from China, while in US markets, the implied Fed funds futures are currently pricing in about a 40% chance of another 50 basis point cut. 

In South Africa, improving economic activity has also positively affected the domestic currency, along with reduced political risk after forming a centrist government and increased foreign appetite for local assets.