Big petrol price relief for South Africa

South African motorists are likely to avoid sharp increases in petrol and diesel prices next month as the oil price drops and the rand strengthens on the back of an apparent ceasefire between Israel and Iran. 

This has ended fears of potential disruption to the oil supply through the crucial Strait of Hormuz, with over a quarter of global oil flowing through the narrow body of water. 

Iran has repeatedly threatened to close this strait in retaliation for strikes against its military installations, spooking oil traders. 

However, the conflict has had little impact on global oil trade, with supply from the region actually increasing year-on-year despite the series of attacks. 

With a ceasefire apparently in effect, the risk premium attached to oil is likely to significantly reduce as there is minimal chance of future supply disruptions. 

US President Donald Trump said that Israel and Iran had agreed to a “total ceasefire,” according to a Truth Social post, then he followed up to say the agreement was “now in effect”. 

Iranian Foreign Minister Abbas Araghchi said that his country would hold fire if Israeli strikes stopped, Bloomberg reported. 

This has also been coupled with the Organisation for Petroleum Exporting Countries (OPEC) stating that it would increase supply to limit the impact of the conflict on oil prices. 

OPEC had also loosened its supply restrictions earlier this year, with several countries rapidly increasing their output to maintain market share. 

These countries do not want an elevated oil price, with higher prices likely to push countries and companies to reduce their reliance on the commodity in favour of cheaper alternatives. 

As a result, after initially spiking by 13% after Israel’s first wave of strikes, the price of oil has come down sharply to $66.34 per barrel. 

This is an 11% decline over the past five days, with the oil price now down over 4% over the past six months and 18% year-on-year. The price is now lower than it was before Israel’s first strike. 

Old Mutual Wealth chief investment strategist Izak Odendaal pointed out that even prior to the ceasefire, the price of oil in rands was still 7% lower than a year ago. 

Thus, the impact of higher oil prices on inflation would have been limited, as increases in fuel prices would not have been as sharp as expected. 

Ultimately, petrol and diesel prices may even see a decline at the pumps next month, with the decline in oil prices being coupled with a stronger rand. 

Over the past day, the rand has strengthened 1.66% against the dollar to trade at R17.81 to the greenback at 08:00 a.m. 

Inflation implications

Odendaal explained that the levels at which the Israel-Iran conflict took the oil price to were unlikely to significantly impact South Africa’s inflation outlook. 

The oil price at the end of last week, before the ceasefire was announced, was still 7% below its level last year in rand terms. 

Apart from that, the Reserve Bank prefers to ‘look through’ these short-term shocks to better understand the longer-term second-round impact on other goods and services. 

Governor Lesetja Kganyago will probably feel lucky that he scheduled the next Monetary Policy Committee for 30 July, Odendaal said. 

This will give him and his colleagues time to assess where the oil price and rand-dollar exchange rate settle. 

On Friday, the rand oil price was still 7% lower than a year ago and did not ring alarm bells, but this could still change.

Odendaal also explained that oil prices have a lower impact on inflation than in the past due to the rise of alternative energy sources in the production of goods and services. 

It will also have a look of June’s inflation data. May’s inflation was probably the bottom of the cycle, but at 2.8% it was below the Reserve Bank’s 3% to 6% target range for the third month in a row. 

It should drift higher from here and remain close to the 4.5% target over the medium term, unless the global environment changes dramatically. 

There has been no formal announcement on moving the inflation target as yet, but the Reserve Bank appears to be implicitly targeting the lower end of its target range. 

This would be a good time to lower the inflation target, as inflation is already hovering below 3%, meaning that the Reserve Bank would not have to maintain this level.