Big petrol price cut on the cards for South Africa in September
Despite global market turmoil this week weakening the rand, the concomitant drop in the global oil price is creating a sizeable over-recovery in fuel prices locally – setting South Africa up for petrol and diesel price cuts next month.
Data from the Central Energy Fund for the end of the first week of August shows that petrol prices are displaying an over-recovery of around 83 cents per litre, while for diesel, it is between 81 cents and 98 cents per litre.
The downward shift in international product prices (tracking oil prices lower) is contributing around R1.00 to the over-recovery, while the weaker rand is reducing this by about 10 cents per litre.
- Petrol 93: decrease of 86 cents per litre
- Petrol 95: decrease of 81 cents per litre
- Diesel 0.05% (wholesale): decrease of 84 cents per litre
- Diesel 0.005% (wholesale): decrease of 98 cents per litre
- Illuminating paraffin: decrease of 101 cents per litre
South Africans saw a small petrol and diesel price cut this week, with prices coming down by 15 cents and 17-28 cents per litre, respectively.
However, the cuts marked the fourth consecutive month of reductions in price, wiping away close to R2.40 from prices, and almost completely reversing the R3.00 per litre increase in prices since the start of the year.
Should the current market trends continue, and prices get cut again in September, South Africa will enter a net decline in fuel pricing for 2024.
Note: As it is still the start of the month, pricing can still fluctuate wildly or even reverse if markets turn. A better picture of where fuel prices will go will form in the middle of the month and as we approach September.
Market turmoil
The main drive behind the current over-recovery is the lower oil price, which has fallen below $80 a barrel.
According to Bloomberg analysis, markets on edge over a possible retaliatory strike by Iran on Israel as payback for assassinations of Hamas and Hezbollah leaders.
Brent futures traded near $78 a barrel on Thursday (8 August) after rising 2.4% on Wednesday.
Even though oil remains below $80 a barrel, the price is currently rebounding after falling to a seven-month low on Monday amid a rout in global equity markets.
“A halt to crude production from Libya’s biggest field has helped underpin the gains, while a rare cross-border attack by Ukrainian troops into Russia added to geopolitical tensions,” Bloomberg said.
This means that the contribution to the over-recovery is likely to decrease as markets continue to stabilise.
However, oil prices are facing pressure on both sides – there are supply risks, pushing prices up (crude stockpiles fell for a sixth week to their lowest since February) and there are demand risks, keeping prices down.
The demand-side issues relate to faltering demand from the world’s biggest consumer, China. But Bloomberg said the supply risks may keep this in check.
The other side of the equation is the rand.
The rand, like other emerging market currencies, was weaker this week as markets panicked over a potential recession in the US following weak jobs data last week.
There was also a massive sell-off in Asian markets as investors piled into safe-haven assets. Markets have since started stabilising, with the rand also recovering some of its lost ground – but it is still trading weaker relative to July.
The path ahead for the rand will be determined by global and local market moves around interest rate cuts.
Fears of a recession have led to calls for the US Fed to cut rates urgently, with some economists pencilling in higher, faster cuts starting in September.
Previously, the expectation was that the US would cut rates by 25 basis points in September and slowly proceed with the cutting cycle from there. Some expectations are for this to be a 50 basis point cut, followed by another in November, and smaller cuts in December and January 2025.
However, this is far from set in stone.
For South Africa, the projected cutting cycle has not shifted. Economists still expect a 25 basis point cut in September and another in November – with a terminal rate of 7.25%-7.75% by mid-2025.
If South Africa maintains a slower cutting cycle versus the US, the rand will likely benefit and strengthen from the largest differential. If South Africa cuts ahead or in tandem with the US, the rand will likely remain under pressure.
According to Citadel Global director, Bianca Botes, US jobless claims data scheduled for Thursday will potentially impact markets further in the near-term.
The rand, meanwhile, remains cautious, recouping modest ground to trade at R18.34/$, R20.06/€ and R23.29/£.
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