Trouble for petrol prices in August
Petrol prices are showing a small over-recovery after the first week of July – but risks are high that the picture could change before the end of the month as global oil continues its march higher.
Data from the Central Energy Fund at the end of the first week of July shows that petrol prices are showing an over-recovery (potential cut) of around 11 to 13 cents per litre, while diesel has an under-recovery (potential hike) of between 16 and 31 cents per litre.
These recoveries are at a time when the rand/dollar exchange rate is relatively strong at R18.12 to the dollar, following a week of volatility.
Global oil prices, however, have continued to steadily climb, now sitting at close to $86 a barrel. June’s average was just under $83 a barrel, hence the under-recovery.
These are the expected changes at the end of the first week ending 8 July:
- Petrol 93: decrease of 11 cents per litre
- Petrol 95: decrease of 13 cents per litre
- Diesel 0.05% (wholesale): increase of 16 cents per litre
- Diesel 0.005% (wholesale): increase of 31 cents per litre
- Illuminating paraffin: increase of 25 cents per litre
According to Bloomberg analysis, Brent crude spiked in price as a storm system—dubbed Beryl—hit the US mainland, causing about 85% of Houston, Texas, to lose power.
“Recovery efforts are in progress in Texas, with some infrastructure — like the Port of Houston and the Explorer Pipeline — remaining offline,” Bloomberg said.
However, even outside adverse weather conditions crude remains solidly higher year-to-date, aided by OPEC+ supply cuts that have tightened the market, as well as expectations that the US Fed is poised to lower interest rates, the group said.
“Forecasts for higher fuel consumption through the northern hemisphere summer have been supportive of prices, although there are growing indications the optimism is fading,” it said.
Investec chief economist Annabel Bishop warned that after two months of falling petrol prices in South Africa on lower international petroleum product prices, the recent lift, if sustained, could see higher fuel prices in August.
More positively, however, the rand’s strengthening trend could reverse or, at the very least, soften the blow of rising oil.
Bishop noted that it is forecast to average R18.00/USD this quarter, “likely seeing some sustained strength towards the quarter end, if not earlier, as the US rate cut nears”.
This should exert some downward pressure on fuel prices, she said.
“A moderation in oil prices over the medium- to longer-term would aid in bringing down inflation, and anchoring it close to targets, in turn contributing to a lower interest rate environment,” Bishop said.
The rand’s recent strength is a reversal of the weakening seen last week, which was driven by a much stronger dollar. The local exchange rate has shaken off pre- and post-election jitters, with the US interest rate moves once again in the driving seat.
The rising probability for an earlier start to the US interest rate cut cycle has underpinned the rand, aiding its strength from nearer R19.00/USD in the first half of June.
The rand appreciated after the South African national election at the end of May, as a successful establishment of government occurred in a peaceful and orderly manner with the ANC, centrist DA and some small parties, calming investor sentiment.
The government of national unity has since avoided a tilt to the left. The rand lost the risk premium built in ahead of the election when it weakened to R19.27/USD from R18.30/USD at the start of the year.
Financial markets have been digesting the minutes from the US Fed’s committee, and is now optimistic that the US interest rate cutting cycle will start later this year, with markets now anticipating the first cut in November.
This has led to positive sentiment which has seen the rand trend towards R18.00 to the dollar.
Bishop warned, however, that volatility is likely to continue, making it difficult to predict fuel prices in August.
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