Oil could hit as high as $300/barrel – and bring more pain for South Africa: Investec
The rand and South Africa’s petrol price are in for a turbulent second half of 2022 as a combination of global and international factors hit, says Investec chief economist Annabel Bishop.
“Q3 2022 is still at risk of marked weakness, both for the rand and for all risk assets, with lower liquidity levels in global financial markets as there is seasonally less trading activity in financial markets in the Northern Hemisphere summer months,” Bishop said in a research note on Monday (4 July).
“With the bulk of global wealth held in the Northern Hemisphere, and senior traders typically winding down risky positions in Q2 2022, and taking a vacation in Q3 2022, the very thin markets typically exacerbate risky events, increasing risk-off investor behaviour.”
She added that the rand, and other risk assets, typically see greater weakness in the middle two quarters of the year – and greater strength in the first and last quarters of the year – with the local currency driven mostly by factors affecting global financial markets.
Investec is decidedly less bullish about global oil prices – citing concerns about the ongoing war between Russia and Ukraine and associated sanctions.
“Increased sanctions on Russia are expected to further push up oil prices towards the $200/barrel, and if very severe, possibly towards $300/barrel, which is worrying markets, and adding to risk-off sentiment, as uncertainty negatively affects risk sentiment.”
With the Russian/Ukraine war showing no signs of coming to an end, and continuing to negatively affect energy and food commodity prices, Bishop forecasts that high inflation is set to continue in the second half of 2022 and the first half of 2023.
This high inflation is also set to damage consumer confidence and real spending, she said. Brent crude was trading at $112.3/barrel at 12h15 on Tuesday (5 July).
This points to further increases in South Africa’s petrol price, with the rand and global oil prices two of the biggest factors in determining monthly increases. While it is difficult to forecast exactly how global oil prices will increase the cost of fuel in South Africa, economists have warned the price of fuel may rise to as high as R40 a litre.
Bishop also warned that the ongoing crisis at Eskom could have long-term ramifications for South Africa’s economy if it is not dealt with swiftly.
“The current severe degree of load shedding is not expected to continue over Q3 2022, but if it did, it would collapse the South African economy into recession, after the contraction that is expected to have occurred in GDP in Q2 2022.”
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