Big drop in petrol prices expected for June
Despite persistent rand weakness, muted international oil prices are pointing to a sizable petrol price cut in June.
According to the latest data from the Central Energy Fund, petrol prices are in line for a cut of 97 cents per litre in June 2023, with diesel prices expected to come down by R1.05 per litre.
The main driver behind the significant over-recovery in prices this month is a much lower international oil price, where a barrel of crude has remained fairly stable at around $75. This is in stark contrast to the highs of around $85 a barrel just a month ago.
The lower oil price is currently contributing R1.40 per litre to the over-recovery in local petrol and diesel prices – while the weaker rand has cut this by around 35 cents per litre.
The Department of Energy (DOE) has noted that its daily snapshots are not predictive and do not encompass other possible modifications, such as slate levy adjustments or retail margin changes. The department determines these adjustments, which consider various factors, at the end of the month.
Domestic fuel costs are primarily governed by the rand/dollar exchange rate and international oil prices. In South Africa, the fuel price is adjusted on the first Wednesday of every month based on these two factors.
The rand has come under extreme pressure in May, beaten by market anxiety over the prolonged energy crisis and geopolitical missteps by the government and its proximity to Russia.
On Tuesday, the rand was trading at R19.29 against the dollar, having cooled off from hitting a new all-time high against the greenback last week at R19.52.
The currency’s slight recovery on Monday and Tuesday can be attributed to market expectations of yet another interest rate hike coming from the South Africa Reserve Bank’s Monetary Policy Committee meeting on Thursday (25 May).
Given the rand’s persistent weakness – and in anticipation of still-high inflation numbers being reported on Wednesday (24 May) – economists and analysts believe the SARB has no choice but to hike rates yet again.
The baseline expectation is that there will be another 25 basis point hike – but another 50 basis point hike could also be likely.
Economists at Nedbank said that consumer inflation is expected to have eased to 6.9% in April after surprising to the upside at 7% and 7.1% in February and March, respectively.
Transport and food will remain the main drivers of the headline figure, the bank said.
According to the Bureau for Economic Research, the inflationary impact of load-shedding has been exacerbated because concerns around the power crisis have arguably been a major contributing factor to the recent rand crash.
“If sustained, the weaker currency will have adverse price impacts,” it said.
However, both groups indicate that a lot of the price pressure due to load shedding and inflation is being counteracted by lower global oil prices.
“On a monthly basis, we expect consumer prices to have increased by a modest 0.5% in March, following a 1% rise in February. The smaller monthly increase mainly reflects a slower rise
(0.1% mom) in the petrol price, curbed by the subdued global oil prices,” Nedbank said.
According to Bloomberg analysis, crude oil has retreated by about 10% so far this year as China’s lacklustre recovery after it abandoned Covid Zero, and the US Federal Reserve’s most aggressive monetary tightening campaign in a generation, combined to weigh on sentiment.
Also, Russian oil exports have remained robust, with flows not yet showing signs of the output cuts that the country insisted it was making.
Despite this, markets are always on alert for any sudden shifts, with Bloomberg noting the move by OPEC+ nations that surprised the global crude market recently with a supply cut that started to take effect this month.
If global oil prices remain subdued, and markets react positively to the SARB’s rate moves this week giving the rand a boost, relief at the pumps in June may be even greater.
Read: What to expect from the Reserve Bank’s interest rate announcement this week
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