Petrol price increase on the cards for South Africa next month

South African motorists are set to feel some pain in July, with the latest forecast indicating price increases for both petrol and diesel at the pumps next month. 

This is largely due to a sharp spike in oil prices last week after Israel carried out a wave of strikes against Iran. 

The conflict has since escalated, stoking fears of a regional war that could significantly impact the region’s oil supply. 

Any disruption will have a major impact on supply as the Middle East accounts for a third of global crude oil production.

As a result, the price of oil spiked by as much as 13% on Friday after the strikes, having its largest daily gain since Russia’s invasion of Ukraine. 

South Africa’s Central Energy Fund tracks fluctuations in the price of oil and the rand-dollar exchange rate to forecast the price of fuel in the country for the coming month. 

Its latest data indicates the following changes to the price of petrol and diesel for July –

• Petrol 93 – increase of 6 cents per litre
• Petrol 95 – increase of 9 cents per litre
• Diesel 0.05% – increase of 10 cents per litre
• Diesel 0.005% – increase of 12 cents per litre

The oil price has somewhat moderated since the initial spike, with it trading at $74.4 per barrel on Tuesday morning. 

This is largely because Iran’s oil-exporting infrastructure has been spared, with much of the fallout confined to shipping. 

However, there are fears the country could block the Strait of Hormuz, disrupting around 20% of all daily oil output. 

The price of oil remains far higher than it was before Israel’s strikes, and all losses have been erased for the year-to-date. 

JPMorgan Chase warned that the oil price could reach as high as $130 in a worst-case scenario, nearly double current levels. 

A sustained rise in fuel prices is likely to result in higher global inflation. Highly open, oil-importing countries such as South Africa may be particularly hard hit. 

This will significantly complicate central banks’ efforts, including the Reserve Bank’s, to reduce the cost of borrowing through interest rate cuts.

The rand, on the other hand, has managed to hold its own versus the dollar since the conflict broke out, remaining below R18 to the greenback. 

Over the past month, the rand has actually strengthened versus the dollar by over 1.5% and has been spared the worst of the fallout. 

This is somewhat strange for the currency as such a conflict typically results in investors fleeing emerging market assets for relative safe havens, such as the US dollar. 

The rand also trades as a proxy for sentiment towards emerging markets due to the country’s deep capital markets by developing economy standards. 

A solid rand will minimise some of the impact of a higher oil price, but it is unlikely to offset such a large increase in the commodity’s price. 

The graphs below show the sharp increase in the price of oil and the rise in the Basic Fuel Price in South Africa.