Huge relief for petrol prices in South Africa comes with a big catch

Oil markets swung significantly on Tuesday (24 June) following reports of a ceasefire between Israel and Iran, but analysts warn that risks have not completely subsided and tensions remain high.

US President Donald Trump announced a ceasefire between the warring nations earlier on Tuesday, but both nations continued to launch operations against each other, highlighting the fragility of the agreement.

Despite questions on how long a ceasefire could last, oil markets pulled back significantly from previous highs over $80 a barrel, back below $70 a barrel during trade on Tuesday.

This reversal, if sustained, will soften the blow of an expected petrol and diesel price hike in South Africa in July, which was building to around 50 cents per litre on Monday.

With oil pulling back, this under-recovery should become more positive, though whether it will be enough to swing back to an over-recovery remains to be seen.

Unfortunately, this also comes with the caveat that prices could surge once again if Israel and Iran defy the United States and continue on the warpath.

According to economists at Schroders, global conflict often transmits into wider economic and market performance via inflation, and energy prices are a key contributor.

This is why, during geopolitical flashpoints, the oil price becomes a point of focus.

Fortunately, the group said the global economy is currently in the middle of a healthy oil surplus, which has been crucial in keeping prices lower despite the conflict in the Middle East.

“Despite the events of recent days, there has not yet been any significant disruption in oil flows from the region,” they said.

In addition, the troubles in the Middle East are not new and have largely already been priced into the risk premium attached to oil.

The economists said that the current price, around $70 a barrel, already includes a 20% risk premium, taking into account possible future disruptions.

“With no short-term supply disruption and this additional risk already priced in, the market remains relatively stable for now,” Schroders said.

How things are different to last time

This should temper some analysts who posited that prices could surge to $130 a barrel and levels last seen during the start of Russia’s invasion of Ukraine.

Old Mutual Wealth Investment Strategist Izak Odendaal shared similar views, noting that the impact on oil prices from the current conflict is unlikely to be as bad as it was during the 2022 invasion.

Odendaal said that the world is less dependent on oil than it was in the 1970s, so even extreme moves will cause less damage.

With the Russian invasion of Ukraine, Russia, as an oil producer, weaponised its oil and energy supplies in Europe at a time the world was recovering from the Covid-19 pandemic.

This caused a wild surge in oil prices, while stifled grain production from the region led to a sharp spike in inflation.

As it stands, Iran is in no real position to weaponise its oil output—only 2% of the global total—with no support from its OPEC partners in the region.

“Further price moves do not only depend on Iran’s actions, but also on what other major oil producers do, notably the OPEC cartel,” Odendaal said.

“OPEC has spare production capacity, and the likes of Saudi Arabia and UAE are not particularly sympathetic to Iran.”

Tightening oil supply risks giving up the market to other producers, while the global economy may not be able to support higher prices due to the US tariff war, so demand will drop.

“This is not a desirable outcome from an OPEC point of view,” Odendaal said.

Nevertheless, higher oil prices are still bad news, leading to rising petrol prices and upward pressure on inflation. This is something that can’t be shrugged off, and will have an impact on consumers/

“Higher fuel prices could lead to ongoing inflation if firms pass the costs on to consumers, or it can simply make everyone poorer, much like tariffs” Odendaal said.

“The oil price is essentially a global tax, and the higher it is, and the longer it remains elevated, the less money businesses and consumers have to spend on other things.”