Bombshell for petrol prices in South Africa

The United States’ decision to bomb nuclear sites in Iran this weekend has already started sending shockwaves through global markets, and oil prices are expected to rise sharply as a result.

Some analysts believe oil prices are now at risk of almost doubling to over $130 a barrel, which could see local petrol pricing surge.

US President Donald Trump announced on Saturday (21 June) that key nuclear enrichment facilities Iran had been “completely and totally obliterated” in a US bombing operation.

The operation marked the United States’ first direct involvement in the Israel-Iran war, as well as a significant escalation of the conflict.

The White House said the aim of the operation was to prevent Iran from gaining nuclear weapons, and warned that further attacks could happen if the Middle Eastern nation did not “make peace”.

According to Nigel Green, CEO of financial advisory giant deVere Group, the US attack has already fundamentally shifted the global outlook and is reshaping investor expectations across asset classes, sectors and geographies.

“As markets reopen, investors are bracing for sharp volatility, with crude oil prices expected to surge and inflation forecasts now under intense scrutiny,” he said.

“A conflict that had remained largely contained is now threatening to trigger broad-based repricing across the global economy.”

Green said the US strike on Iran’s nuclear sites is a market-defining moment, and “a direct hit” to the assumptions that have been driving investor positioning: lower inflation, falling rates, and stable energy prices.

“This framework has just been broken,” he said.

But one of the most immediate impacts will be felt in oil, where Brent crude has already been climbing steadily in recent weeks.

As markets now look to find a position amid risks of retaliation and escalation, some analysts expect prices to spike toward $130 a barrel.

“Any closure or threat to the Strait of Hormuz, through which nearly 20% of the world’s oil flows, would send prices sharply higher,” Green said.

“Such a price shock would filter through to global inflation, which remains elevated and/or sticky in many regions.”

South African fuel prices have been riding out the fluctuations in global oil prices, with consecutive cuts over the past four months driven by a circa 15% drop in oil prices.

The latest data from the Central Energy Fund (CEF) this week showed that the impact of the Israel-Iran war was already hitting local prices, with recoveries swinging into the negatives.

A 40-cent per litre price hike was forecast before the US attacked Iran. If oil prices surge as expected, there will be even worse to come.

Interest rates are also at risk

South Africa’s woes won’t end at higher fuel prices, however. A surge in oil will have an impact on inflation and could flip the direction of interest rates.

Markets have been pricing in rate cuts resulting from lower inflation due to fuel price drops. If fuel prices surge, the entire framework flips.

“If inflation spikes back up, monetary policymakers will be forced to hold, and possibly even reconsider the easing cycle altogether,” said Green.

“That fundamentally changes the landscape for equity sectors, currencies, and credit.”

In equities, Green said the most immediate reaction is likely to be a rotation out of rate-sensitive and consumer-driven sectors.

“Travel and tourism companies, which are highly vulnerable to energy costs and geopolitical disruptions, are expected to come under pressure. Tech stocks, particularly those trading on high multiples, may also see selling as the bond market rethinks the rate outlook,” he said.

Safe-haven flows are expected to intensify, which could see gold rally further as investors try to hedge risks.

Looking at currencies, the rand is expected to weaken against the dollar over the short term but could strengthen longer term due to dollar weakness.

“Currency markets could see a short-term bid for the US dollar on safety grounds, but the longer-term picture is more uncertain,” Green said.

With America now deeply embedded in a widening Middle East conflict and inflation risks rising, the dollar’s appeal could diminish if the US growth outlook deteriorates.

“The dollar may rally initially, but this isn’t a clean safe-haven story,” said Green.

“If oil drives up inflation and suppresses consumer demand, we may see slower growth in the US and renewed pressure on fiscal stability. That’s not necessarily a supportive environment for the dollar longer-term.”