Motorists in South Africa can expect more good news about the petrol price

 ·28 Jul 2022

Chief economist Investec, Annabel Bishop says that South Africa is in line for a cut in the petrol price of nearly R2.00 per litre in August given the drop in the international gasoline price.

“With only a few days of July left, lower energy prices this month are indicating a 7.4% drop in South Africa’s petrol price in August, and a 6.2% decline in the diesel price, which will provide some welcome relief to high living costs,” Bishop said in a note on Wednesday (27 July).

The economist said that energy prices have dropped as global growth expectations for this year and next year drop lower again. The International Monetary Fund (IMF) published a gloomy outlook for the global economy, warning that the United States has only a slim chance of avoiding recession, she said.

“The IMF now expects global growth of 3.2% y/y this year, revising it successively lower from the 3.6% y/y expected for 2022 in its April WEO update, and 4.4% y/y in January’s WEO, while in October last year the IMF forecast 4.9% y/y for 2022.

“Indeed, in June last year the IMF forecast 5.0% y/y for 2022 growth. The successive downward revisions reflect the building negative expectations for global economic activity this year and next, with the IMF now forecasting 2023 world GDP growth at 2.9% y/y.”

The downward revision for 2023’s IMF global growth expectation is quite material, said Bishop, adding that the IMF warns “it will test the mettle of central banks to continue raising interest rates in a bid to restore price stability”.

“It’s easy to cool off the economy when it is running hot. It’s much harder to reduce inflation when the economy is close to a recession,” the financial institution said.

Bishop noted that the oil price has reversed in July, from a high of $117 per barrel in June, to around $105 per barrel on average in July. In trade on Thursday, the price of brent crude was around $108 per barrel.

Oil extended gains after a big draw in US crude inventories, while the prospect of a slower pace of interest rate hikes from the Federal Reserve filtered through markets, buoying commodities, Bloomberg reported.

South Africa, Bishop noted, is mainly importing refined petroleum products, and the price of gasoline has seen similar directional movements as oil from May to July. “Indeed if the rand had not weakened materially over July, SA would be in line for a R3.00/litre cut in the petrol price,” the economist said.

“To date, the rand has weakened by over R1.00/USD on average in July to date versus June, as safe haven flows increased, with worries over slowing global growth and even recession placing downwards pressure on oil and gasoline prices.”

The good news is that the local unit has rebounded strongly against the dollar in recent sessions, due mainly to a softening dollar.

The rand managed a break below R16.70/$ after the US Federal Reserve on Wednesday implemented a widely expected second consecutive 75 basis point interest rate hike.

It traded at the following levels against the major currencies:

  • Dollar/Rand : R16.69  (-0.57%)
  • Pound/Rand: R20.31  (0.92%)
  • Euro/Rand: R17.04  (-0.52%)

“Today’s US GDP numbers, relating to the previous quarter, will provide a better understanding on whether or not the US is heading for a recession,” said Bianca Botes, director at Citadel Global.

The rand closed stronger at R16.70 last night and is testing even stronger this morning, said TreasuryOne currency experts. “We could be in for some consolidation as the rand has rallied strongly over the last week, back from the R17.30 we saw. For now, the R16.50 to R17.20 range seems to be the likely place where the currency settles.”

A weaker dollar has also helped to put wider commodity markets on a firmer footing. The Bloomberg Dollar Spot Index slipped for a second session to the lowest level since July 5, making commodities priced in the currency more attractive to investors.

The Department of Mineral Resources and Energy (DMRE) meanwhile welcomed the reduction of international petroleum product prices, including crude oil prices.

“Despite this reprieve coming to an end on 2 August 2022, the department can confirm that there will still be a sizeable reduction in fuel prices including paraffin for South Africans,” the department said in a statement on Wednesday.

Read: Expect a big petrol price drop next week

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