FNB’s forecasts for petrol prices in South Africa

While motorists saw a slight reprieve in petrol prices on Wednesday (4 May), high fuel costs are set to have knock-on effects on costs in the coming months that may not be immediately obvious, says Renzi Thirumalai, head of investments at FNB Wealth and Investments.

FNB’s forecasts show that petrol prices of more than R20/litre are likely to be normalised over the next two years as oil prices maintain their steep levels against the rand.

This is well below forecasts made by some analysts earlier this year who warned that petrol could hit as high as R40/litre due to the ongoing Ukraine war. A February forecast by Investec indicated that the petrol price could peak at around R25/litre in the short-term before settling around the R20/litre mark over the medium term.

“South Africa’s fuel prices increased again for diesel inland, between 88c/l and 94c/l for diesel at the coast, while the price of petrol decreased by 12 cents a litre on 4 May 2022. The latest fuel price announcement is based on the shortage of diesel supply due to lower exports from Russia as a major exporter of distillate fuel,” said Thirumalai.

“This is despite an intervention by the National Treasury to reduce the cost of fuel by cutting the general fuel levy (GFL) by more than R1 per litre. While this would have brought relief, there is little government can do beyond cutting the GFL.”

Thirumalai said that some of the obvious knock-on effects of the high fuel prices on South African consumers include:

  • Motor vehicle running costs: Vehicle owners will immediately feel the impact and will be paying more to fill up.
  • Transport costs: An increase in fuel prices, means higher costs for companies to operate bus and taxi services. These costs are passed on to the consumer.
  • Consumer goods: An increase in the fuel price impacts the cost of consumer products to an increase in logistic costs. An increase in logistic costs is typically passed onto the consumer, with a basket of goods costing the South African more money as a result.

A hidden cost

One of the less obvious ways higher petrol prices will impact South Africans is through investments.

“Higher fuel prices result in higher inflation and may lead to increases in interest rates. Higher interest rates will have a negative impact on bonds – and while cash rates will increase, they may not be sufficient to offset the impact of higher inflation.

“Higher interest rates are negative for equities generally because of the way they are valued. But higher interest rates and higher inflation is particularly bad for consumer stocks for the reasons mentioned above. There are some notable exceptions in the equities space such as the banks which tend to do well in higher interest rate environments,” said Thirumalai

Higher oil prices will also benefit companies exposed to these prices directly, such as Sasol or even companies with exposure to fuel retail such as Kaap Agri, Thirumalai said.

“Another option may be to invest in oil ETFs or ETNs. There are international options available too with many exciting (energy supply chain) companies available to invest in. One company we particularly like currently is Schlumberger which provides technology and services to the energy industry for reservoir characterisation, drilling, production, and processing.

“Looking towards replacement technologies is also an interesting option. Here we like Enphase Energy – a US-based energy technology company that develops and sells software-driven home energy solutions. Equity exposure remains investors’ best bet against inflation on a relative basis; but as explained, this will vary greatly by sector and even at a stock level.”

Read: Triple blow for households in South Africa

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FNB’s forecasts for petrol prices in South Africa