Bad news about petrol prices in South Africa
The price of oil has risen sharply over the past few weeks as increased tension in the Middle East threatens to disrupt supply, offsetting reduced demand from developed economies.
This is likely to minimise any potential petrol price cuts for November and potentially push prices higher if a regional war breaks out between Israel and Iran.
Although the Middle East’s role in global oil supply has been limited in recent decades by fracking in the US and increased supply from South America, it remains the source of around a quarter of all oil.
Iran is a key part of the region’s overall supply, exporting over one million barrels a day, mainly to China. Israel has not ruled out striking Iran’s oil facilities.
Any escalation to the conflict would send the price of oil skyrocketing and over the past week, traders have begun pricing in such a possibility.
Since the conflict began over a year ago, oil prices have been largely unaffected as supply from the region has been relatively flat.
Price movements have been driven by supply cuts from the Organisation for Petroleum Exporting Countries (OPEC) and reduced demand from the US and China.
Before the missile strikes on Israel, the oil outlook was rather bearish, with reports that Saudi Arabia was considering abandoning the OPEC production cuts it agreed on. This would basically mean starting a price war that could send prices even lower.
However, fears of a retaliatory Israeli strike on Iranian oil facilities have become the primary concern and pushed the price of oil briefly above $80 per barrel this week.
The price has moderated since then, returning to $76 per barrel. This is still an increase of 7% in the past month and is likely to put pressure on local petrol and diesel prices.
Investec chief economist Annabel Bishop said the rapid rise in geopolitical risks has seen the oil price climb from around $70 per barrel at the end of September.
Recent comments from OPEC+ that Brent crude should be around $80 have also contributed to the price rise.
Iran can also disrupt the global oil market by impairing maritime traffic in the Strait of Hormuz, a vital chokepoint through which most Middle Eastern oil is transported.
Crucially, geopolitical tension also tends to result in a stronger dollar as investors flock to safety. This makes the rand relatively weaker and importing oil more expensive for South Africa.
The rand reached R17.64/USD this week, up from R17.03/USD at the end of September, due to escalating geopolitical tensions.
These factors have resulted in the rand price for oil rising by 7% since the beginning of oil to over R1,400 per barrel. If sustained, this will result in increased petrol prices in November.

South Africa may yet avoid the worst of petrol price increases as disruptions to the supply of oil from the Middle East are not definite.
Furthermore, despite stimulus in China, demand for oil from the world’s second-largest economy and No. 1 oil importer remains weak.
As the US economy slows, demand will continue to come under pressure. If coupled with the removal of OPEC supply caps, the price can be pushed lower.
OPEC and Russia, known as OPEC+, implemented a series of production cuts since 2022, amounting to around 5 million barrels per day, or 5% of global demand, to support prices.
Unwinding this could theoretically replace Iran’s total output of 3 million barrels per day if the cartel feared that oil markets would become destabilised, Old Mutual Wealth investment strategist Izak Odendaal said.
In other words, while oil prices could still move even higher, it seems unlikely that prices would spike back to $130 per barrel, as was the case in the wake of the Russian invasion of Ukraine.
Certainly, a repeat of the 1970s oil shocks, sparked by the Yom Kippur War in 1973 and the Iranian Revolution in 1979, is highly unlikely.
Odendaal said oil prices rose tenfold in real terms between 1970 and 1980, devastating a global economy that was much more dependent on oil than it is today.
It should also be noted that at $76 per barrel, oil prices are still 9% below levels from a year ago. At these levels, oil is still detracting from headline inflation rates, not adding to them.
The same is true in South Africa, where the rand price of oil is still 18% lower than a year ago. The big question, as always, is not the direct impact on inflation rates but the “second round” impact where companies pass on higher input costs to customers.
One reason for the softer oil price before the Iranian missile strike is that Chinese demand has disappointed this year.
Rather than staging an anticipated recovery, China’s economy has been sluggish, limiting oil demand. Electric vehicle adoption is also ahead of other parts of the world, as home-grown brands are increasingly taking market share.
China’s reduced demand for oil is shown below.

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