Good news for petrol prices but big trouble for diesel in South Africa

South African motorists can expect some relief at the petrol pumps next month, with prices expected to decline due to a slight decrease in the price of oil and a stable rand. 

However, those who fill up with diesel are likely to experience some pain, with prices expected to rise next month as producers grapple with a supply squeeze in the northern hemisphere. 

US stockpiles of diesel products have dropped to their lowest levels for this time of year since 1996, while in Europe, benchmark futures are signalling a tighter market than during the height of the Israel-Iran conflict. 

Bloomberg reported that this has largely been due to refinery closures in Europe and the United States and a series of outages at remaining facilities. 

Last month, diesel accounted for just 31.4% of global output of oil products, well below the seasonal average, according to figures from Energy Aspects.

As a result, while petrol prices are expected to come down, diesel prices are likely to rise in August. 

South Africa’s Central Energy Fund (CEF) tracks these changes, alongside the rand-dollar exchange rate, to forecast the changes in the price of fuel for the coming month. 

Its latest data indicates the following changes for August –

• Petrol 93 – decrease of 26 cents per litre
• Petrol 95 – decrease of 23 cents per litre
• Diesel 0.05% – increase of 58 cents per litre
• Diesel 0.005% – increase of 56 cents per litre

The international price of oil has been remarkably steady amidst increased volatility in financial markets due to the looming implementation of higher tariffs on goods imported into the United States. 

Oil has ticked upwards slightly as the deadline moves closer, but US President Trump has extended the deadline to 1 August for some countries, minimising the impact of the original 9 July extension. 

However, a more significant driver is the rising tensions in the Middle East after Israel and Iran concluded a fragile truce. 

There have been fresh attacks on vessels in the Red Sea from Yemen, threatening to disrupt global trade and oil supply from the Middle East. So far, the impact has been minimal. 

The rand, on the other hand, has held its own against the dollar despite continued concerns regarding the stability of the Government of National Unity (GNU) following the firing of DA Deputy Minister Andrew Whitfield. 

The graph below shows the fluctuations in the basic fuel price for various fuel types in South Africa over the last month. 

Big trouble for diesel

Diesel prices are expected to rise in August, despite a flat oil price and a relatively stable rand over the past month. 

This is because demand for diesel is surging in the United States and Europe as the northern hemisphere’s driving season enters its peak and stockpiles are at historic lows. 

The pressure on supplies has been driven by refinery closures on both sides of the Atlantic and a slew of recent outages, as well as the impact of production curbs by key Organisation for Petroleum Exporting Countries (OPEC) producers. 

The shortage is driving up prices for diesel, used in everything from construction to transport to heating. In northwest Europe, the premium for more immediate supplies over the following month surged to $44 a tonne. 

Diesel markets spiked last month when the fighting between Israel and Iran threatened millions of barrels of fuel exports from the Persian Gulf. That risk has now receded, but supplies remain under pressure.

Bloomberg reported that Saudi Arabia and Russia, both of which pump crude at the heavier end of the spectrum, caused the biggest OPEC+ output cuts. Meanwhile, Kazakhstan boosted the output of its very light Tengiz crude earlier this year.

Increases in OPEC oil production — set to be even faster than expected next month — should offer some support for diesel supply. Healthy refining margins should also encourage plants to run hard.

But there are also risks. Summer heat waves can pressure production, while the North Atlantic hurricane season is a potential danger for the US output of diesel and other fuels.

The graph below, courtesy of the CEF, shows the wide gap between the international prices of diesel and petrol.