South African motorists can expect a slight drop in petrol prices in July, and macroeconomic indicators suggest that the trend may continue.
Fuel prices are largely determined by the cost of importing oil from international producers, including additional costs such as insurance, storage, and transport.
The oil price, in rand, is determined by the international oil price in US Dollars and the local currency’s strength.
Efficient Group chief economist Dawie Roodt said the oil price is trending lower, and the rand is strengthening. It bodes well for local petrol prices.
The decline in the oil price – from $83 a barrel in April to under $70 a barrel this week – surprised many stakeholders.
Earlier this month, Saudi Arabia said it was cutting output by one million barrels per day, as the OPEC+ alliance of major oil-producing countries faces declining oil prices and a looming supply glut.
It did not result in a price increase, as expected. In fact, the oil price dropped to levels last seen in 2021.
Roodt said there are many reasons for the lower oil price.
- The oil reserves of non-oil-producing countries in the West are much higher than a year ago.
- A lot of Russian oil is entering the market, which many people are not aware of. There is also a cap on how much you can pay for Russian oil, which forces the international price lower.
- Many oil producers in the United States have increased production.
- The new Brazil President, Luiz Inácio Lula da Silva, is friendly with Venezuela’s President, Nicolás Maduro, which can result in Venezuelan oil entering the market.
He added that the OPEC+ alliance is inherently unstable as it incentivises the smaller countries to pump more oil.
“All these factors have resulted in a much lower-than-expected oil price in recent weeks,” Roodt said.
Roodt cautioned that a crisis could see the oil price spike again. However, in the absence of a crisis, he expects the oil price to drift lower.
Rand strengthening expected
Outside of the oil price, the strength of the rand is another factor which directly influences the local petrol price.
Roodt said a fair price for the rand is around R16.50 to the US Dollar. However, it is unlikely to go there soon.
He explained that the rand is always undervalued, but at R18.50/USD it is far more undervalued than usual.
There are reasons for it, including poor economic growth, political instability, and geopolitical tensions. But even then, R18.50 is too weak.
“If there are no mistakes from the government, I expect the rand to strengthen to around R17.50 to the US Dollar,” he said.
“It can, obviously, change quickly. But everything being equal, R17.50/USD is a number which is quite possible.”