Positive turn for petrol prices in South Africa – but the pressure is on

 ·26 Feb 2024

The latest available data from the Central Energy Fund (CEF) shows that recoveries in fuel in South Africa have pulled back slightly – but a crash in the rand will keep the pressure on in the final week of February.

According to the data, petrol and diesel prices are showing an under-recovery of around R1.15 per litre for petrol and between R1.14 and R1.28 per litre for diesel.

This is about 20 cents lower than the under-recoveries recorded in the middle of the month, presenting a slight relief for motorists, even though prices are still expected to rise by over R1.00 in March.

However, while this is a positive turn, the under-recoveries tracked were at a time when the rand was trading below R19 to the dollar.

The local unit has since tanked against the greenback and is currently trading much weaker at around R19.30 to the dollar.

Investec chief economist Annabel Bishop noted that the rand’s weakness is largely being driven by sentiment out of the United States from US monetary policy officials that there is “no rush” to cut US interest rates, with a need to wait longer to have the “confidence” to cut.

This has fed the prevailing “higher for longer” narrative around interest rates, keeping the dollar stronger and putting the rand on the back foot.

“Markets are now factoring in a delayed start to US interest rate cuts, which has supported US dollar strength, along with the robustness of the US economy in many areas, causing the ZAR/USD currency pair to weaken,” Bishop said.

The economist noted that South Africa’s rand also weakened over the 2010s decade and now the 2020s, as government borrowings elevated, and so the cost of borrowing increased, causing foreign investor appetite for South African bonds to continuously diminish.

“Continued net foreign sell-off of SA government bonds heavily contributed to a strong, downward pressure on the domestic currency, along with a weakening economic growth environment,” Bishop said.

The rand remains far removed from its fair value (PPP or purchasing power parity value) of around R15.00/USD.

The US interest rate cut cycle is expected to see it fall back towards R17.00/USD, although this is being increasingly delayed.

Oil still under pressure

While the rand/dollar exchange risks causing more havoc for fuel prices heading into March, the main driver behind the expected hikes is oil.

The oil price contribution to the under-recoveries (reflected in the movement in international petroleum prices, where it is the main driver) accounts for over R1.00 alone.

While oil prices fell marginally by 2% last week, Bloomberg analysis points to prices trading in the same narrow range of about $3, which remains relatively high.

The higher prices have been driven by tensions in the Middle East and OPEC+ supply curbs offsetting the impact of higher production from outside the group, Bloomberg said.

“The cartel and its allies, including Russia, are widely expected to prolong their current cutbacks into the next quarter at their meeting early next month.”

This is keeping price expectations in the $70-$90 range, with current pricing from Brent at $81 a barrel.

Read: Major petrol price storm about to hit South Africa

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