Even more good news for petrol prices in November – with a warning

Following a fifth consecutive month of petrol price cuts in South Africa this week, October has started off with fuel price recoveries on the front foot once again, with another sizeable over-recovery lined up.
Early data from the Central Energy Fund (CEF) for the end of the first week in October shows that petrol prices are posting an over-recovery of around 82 cents per litre, while diesel is also looking sharp with a 77 cents per litre over-recovery.
This means November is already lining up for a sixth consecutive cut in pricing.
While the start of the month is far too early to make a definitive call on how pricing will end up, it does give a clear indication of how things are starting out.
For instance, global petroleum prices would have to surge significantly to push the recoveries into under-recovery territory, and this would have to go alongside a crash in the rand.
As it stands, oil prices are at around $74 a barrel – much lower than at the start of September – and the rand/dollar exchange is around R17.40 – again, a stronger position relative to the same time last month – hence the over-recoveries.
However, things can still change.
While a wild swing is unlikely, it is not impossible – and economists at the Bureau for Economic Research (BER) have flagged some risks that could put pricing on this path, most notably the escalations in the Middle East.
According to the BER, the price of Brent crude oil, in particular, spiked this week, initially rising following a strike on Israel by Iran. This led to markets pricing in a renewed risk premium into oil.
However, pricing fell back towards the middle of the week.
“Then, yesterday, the oil price surged by about 5% to the highest level in a month after US President Joe Biden said there were discussions around Israel targeting Iran’s oil facilities. The US has said that it would not support a strike on nuclear facilities,” the BER noted.
Iran is a significant player in the global oil market and exports about 1.6-1.8 million barrels per day (with the vast majority going to China).
“It is uncertain if the oil price will stay this high or once again drop back, as OPEC+ does have significant spare capacity and could easily ramp up production in the case of supply not meeting demand. On supply, Libya also announced this week that it would resume full oil production, returning about 700,000 barrels per day, following the resolution of a dispute between rival political factions,” the BER said.
According to Bloomberg analysis of the market, crude soared by about 8% this week, the most since early last year, driven primarily by the escalation of hostilities and the possibility that Middle East oil supplies could be disrupted.
While some analysts are casting doubt on oil supplies being targeted, others are pencilling in further price hikes, which would impact local fuel prices, chipping away at the strong over-recovery seen at the start of the month.
Rand/dollar
The other major component of local pricing – the rand/dollar exchange rate – has also had a tough time.
While the rand/dollar rate is still contributing to an over-recovery – thanks to the rate being fat stronger than at the start of September – the rand’s rally and potential push below the R17/$ mark was stunted and reversed.
After a strong start to the week, the rand exchange rate came under some pressure by the end of it and weakened past R17.50/$ against a generally stronger dollar.
Overall, though, the rand is generally on a stronger footing thanks to the start of the interest rate-cutting cycle in the US and South Africa, while confidence and sentiment around the Government of National Unity continue to boost markets.