South African fuel prices increased significantly on 3 November and the Automobile Association of South Africa (AA) has warned that R20 per litre could still be on the cards by year-end.
The latest price increase, which saw inland 95 octane petrol rocket past R19.50 per litre, has now pushed price inflation to 33.9% for this year, which is expected to have knock-on effects all along the supply chain in the economy.
Unfortunately, projections from FNB paint a bleak picture for the coming months, with Chantal Marx, head of Investment Research at FNB Wealth and Investments, projecting double-digit inflation for fuel prices to persist until at least March 2022.
The main pressure on local fuel prices has been a sharp increase in Brent crude oil prices over the past few months. These prices were driven up by shortages of natural gas in Europe and Asia just as the northern hemisphere entered winter.
“The supply-demand imbalance arising with improved mobility and a slow increase in oil output, together with a switch from natural gas to oil, should place upward pressure on oil prices going into the first half of next year,” Marx said.
“This will continue to be the major driver of elevated fuel prices, but a weaker rand will add to this pressure. ”
Marx said she sees the current R19.54 price for 95 unleaded as the peak but risks are to the upside.
“In any event, we expect fuel inflation to continue in the double-digits until March 2022 before we start benefitting from high base effects and fuel inflation moves into negative territory in the second half next year.”
To offset the impact of rising fuel prices on one’s own pocket as well as your investment portfolio – which may have considerable consumer exposure – investments in the oil space may have an offsetting or hedging impact, said Marx.
She outlined some of the types of oil exposure available to South African investors:
- Direct shares: Investing in oil company shares is one of the simplest methods to obtain exposure to oil prices. The change in the oil price will affect the profitability of the company and in turn, its share price. There are, however, other factors that must be considered like hedging strategies put in place and the underlying fundamentals of the company invested in. There are many oil companies globally to invest in to gain oil price exposure. Locally, the only direct oil playlisted on the JSE is Sasol. Internationally, there’s Shell and Vermilion Energy.
- International oil company ETFs: Oil company ETFs track the price of a basket of global large-cap oil company shares. For example, the iShares Global Energy ETF or SPDR S&P Oil & Gas Exploration & Production ETF. iShares or SPDR will physically own the shares that are being tracked by the index. The price of the ETF will track the price of the basket of oil stocks. The share prices of the underlying stocks will be driven by the fundamentals of the companies, including profitability which will be determined by the oil price (among other things). Owning an oil company ETF has the advantage of adding leverage (within underlying companies) and diversifying exposure.
- A local oil ETN: An ETN provides exposure to the movements in the price of a commodity or other instrument without ever outright owning the commodity. Instead, an ETN uses derivative contracts to gain exposure to the asset price it wishes to track. In South Africa we only have one JSE listed oil ETN, namely the Standard Bank oil ETN. This ETN tracks the Brent crude oil price in rands.
- An international oil ETN: International ETNs work the same as locally listed ETNs however they are not listed on the JSE and are quoted in another currency. The United States Oil Fund ETN is the world’s largest oil ETN and tracks the West Texas Intermediate crude oil price. The United States Brent Oil Fund ETN tracks the Brent crude oil price.
- Finally, investors can consider using derivatives or buying futures contracts directly, however, Marx cautioned against taking this course of action, due to the risks associated in managing these exposures.
“It is important to note that not all investment options in this space may do well since we anticipate the rand oil price to remain elevated over the medium term but that it is at or close to its peak,” said Marx.
“Direct company exposures will probably make the most sense since high oil prices will translate into higher cash flows if oil prices are elevated which could support valuations. Investing in oil price ETFs and ETNs could prove disappointing should our view play out.”