Major red flags over diesel prices in South Africa – with a bleak outlook for November

 ·6 Oct 2022

South Africa’s freight and agriculture industry has warned that higher diesel prices in October will have a knock-on effect on businesses and production – while talk of oil production cuts from OPEC and Russia has raised red flags for higher prices in the coming months.

The Department of Energy announced a petrol price cut for motorists in South Africa, taking effect on Wednesday (5 October). Petrol prices have come down by 89 cents to R1.02 per litre – marking the third consecutive month of petrol price cuts.

Diesel drivers were not as fortunate, however, with the fuel seeing a 10 cents to 15 cents per litre price increase.

Diesel prices are currently subject to a rise in global demand, accounting for the large disparity between petrol and diesel. This demand is increasing with winter coming in the Northern Hemisphere and ongoing disruptions caused by Russia’s invasion of Ukraine.

Andre Botha, a senior dealer at financial consultancy TreasuryOne, said global demand for diesel will remain elevated “for a while” – and will be in play as long as the crisis in the Eurozone continues.

Hitting South African producers hard

The global demand for diesel is already starting to have an impact locally, Grain SA told Farmer’s Weekly this week.

The group said that the higher diesel prices in October, while relatively small, add up for industries using the fuel and will ultimately drive up production costs in the country.

It said that it takes roughly 27 litres of diesel per hour to harvest a crop, which means that the latest increase will result in fuel input costs increasing by roughly R2.70 per hour. Analysts noted that beyond industrial use, diesel is also used in the trucks that deliver goods and resources across the country, further adding to the cost burden.

This is ultimately passed on to end-users and consumers.

The Truck Association of South Africa said that the cost of living will go up as a result, as many companies cannot sustain rising costs.

“The economy is not that strong at the moment, we’re coming from the pandemic, and the load shedding is affecting operations, so there is quite a lot that is happening with the shrinking of the economy. There is already an increase in unemployment, so this is just going to make matters worse,” it said.

The Road Freight Association, meanwhile, said that the situation has become dire for many transporters, who can no longer absorb additional costs.

“Diesel is the fuel source used by most transport companies in South Africa; it is the energy source that drives our logistics chain,” said the association’s Gavin Kelly.

“Every time it increases, it increases the cost of moving the goods through South Africa. We are very aware that the diesel price is determined by external factors; however, the reality is every time the price increases, transporters have to pass that cost on. They cannot absorb it..”

Kelly said that transporters are on their knees, and many do not have the resources to buy diesel in stock or even use credit lines.

“They find themselves in a very tight spot. More often than not, they do trips transporting and delivering goods and only receive payment up to 90 days after the fact. They need to carry that cost of diesel,” he said.

“There are many transporters that can no longer do that – and so quietly, bit by bit, they close their doors and call it quits.”

He said the problem extends beyond freight and is ultimately hitting the poorest in South Africa, who have to bear the brunt of increased transport costs when using public transport.

He said the cost of diesel is more than 58% of the day-on-day operational costs for transport.

Trouble on the horizon

While it is only the start of a new month, and a better picture of where fuel prices are heading in November can be determined closer to the middle of the month, early data from the Central Energy Fund shows that diesel prices in the country are starting out with an under-recovery of around 54 cents per litre.

The daily snapshots are not predictive, as a lot can happen between now and the end of the month when the Department of Energy makes its assessments, but the large disparity between diesel and petrol – showing an over-recovery of around 30 cents per litre – means the current pricing trend is likely to continue.

The knocks also continue on the oil front after the Organiz\sation of Petroleum Exporting Countries (OPEC+) alliance agreed to the biggest production cut since 2020, and Russia warned that a proposed oil price cap could lead to an output hit in Russia.

OPEC and its allies plan to slash daily output by 2 million barrels, Bloomberg reported, though in reality, supplies will be cut by a smaller amount, it said.

Along with the rand/dollar exchange rate, the global oil price is a key driver of local petrol price moves.

Global oil prices have eased in recent months, helping domestic inflation to fall slightly to 7.6% in August. Following the OPEC news, however, oil prices shot up almost 7%, with analysts at Goldman Sachs raising Q4 forecasts to $110 a barrel – a level last seen during the early months of the Russian invasion of Ukraine.

Morgan Stanley said the move will accelerate crude’s path back to $100, Bloomberg reported.

“Notwithstanding demand concerns, the combined impact of OPEC+’s production cut and the EU embargo in Russia’s production suggests a tighter oil market ahead. With our tighter balances, we suspect that Brent will find its way to $100 a barrel quicker than we estimated before,” the finance group said.

Brent crude oil started the month at around $88 a barrel and spiked to $94 a barrel following the news.

Read: Here is the official petrol price for October

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