Red flags for petrol prices in March

 ·6 Feb 2023

A positive move in global oil markets for local drivers is being undermined by a weaker rand, economists say, setting the stage for a higher petrol price in March if conditions persist.

The latest data from the Central Energy Fund for the first week of February shows a major under-recovery in local fuel prices, with petrol set to be hiked by over R1.20 per litre and diesel by 70 cents per litre.

While it is too early in the month to predict the final outcome for March – as February showed, as prices can swing wildly from the start of the month to the end of the month – economists at the Bureau for Economic Research (BER) have flagged a volatile oil and currency market for the weeks ahead.

Local fuel prices are impacted by two key factors – the USD/ZAR exchange rate, and global oil prices, which affect the costs of international petroleum products.

According to the BER, the first week of February saw a softer oil market but a weaker rand, setting local fuel prices on a rocky path.

“The one-month forward Brent crude oil price declined by almost 8% week on week as markets await more clear signs that the reopening of China is resulting in higher demand for oil,” the group said.

“On the other hand, if sustained, the notable weakening of the rand exchange rate towards the end of the week will counter the extent to which a lower oil price will filter through to lower domestic fuel prices.”

According to Bloomberg analysis, oil prices steadied after sinking to the lowest close in about a month as traders took stock of the outlook for demand in China and the latest sanctions on Russian energy flows came into effect.

A European ban on seaborne imports of Russian oil products in response to the war in Ukraine came into effect on Sunday. The measure is coupled with a price cap similar to one in effect for crude and designed to curb Moscow’s revenues while enabling products to flow to third countries.

Oil has endured a bumpy start to 2023 even as China’s ditching of Covid Zero fanned a wave of speculation that the world’s largest crude importer will ramp up imports. At the same time, the Organization of Petroleum Exporting Countries (OPEC+) and its allies have opted to maintain supply cuts.

Analysts expect oil prices to trade sideways, sticking to the current ranges in the near term and escalating later in the year.

The rand, meanwhile, continues to feel the pressure as local economic prospects dwindle in the face of load shedding and no near-term resolution to the energy crisis.

By the end of January, the rand was the second worst-performing currency of 35 currencies monitored by Bloomberg year-to-date and started February on the back foot. The local unit ended last week on a slightly more positive note, however, this was driven by global risk-on sentiment rather than any positive feelings towards the local market.

According to TreasuryOne, the rand has a broad trading range of between R16.80 and R17.40 ahead of President Cyril Ramaphosa’s State of the Nation Address on Thursday, with the market looking for signals on the government’s response to low growth and the energy crisis.

One of the responses could be declaring a risky national state of disaster.

The South African Reserve Bank cut the country’s GDP growth outlook for 2023 to just 0.3%, an extremely bearish view vs market consensus. The SARB said that load shedding and the wider energy crisis will likely shave as much as two percentage points from economic growth this year.

The rand has started the week trading much weaker, approaching the R17.50 to the dollar level as load shedding continues to weigh. According to Citadel Global, the looming greylisting by the Financial Action Task Force (FATF) is also ramping up the pressure.

According to the BER, if the rand’s weakness continues, the effects of a softer oil price on local petrol and diesel costs will not filter through as strongly.

With Bloomberg

Read: Here is the official petrol price for February

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