Things don’t look good for diesel in December

Diesel prices in South Africa shot up by R1.40 a litre today (2 November), with alarm bells ringing for further pain coming in December.

In light of surging global prices and supply constraints, the diesel price has hiked by around R1.40 a litre taking the inland wholesale price to R25.75 a litre and setting back diesel drivers between R1,200 and R2,000 to fill up from empty.

Diesel prices have been under strain for a few months, driven upwards by international demand for the fuel, compounded by local factors.

Speaking to CapeTalk, independent energy researcher Hilton Trollip said that the US and Europe diesel shortage has ripple effects on the cost per litre in South Africa.

Bloomberg reports that portions of Europe are facing low diesel supply with the loss of Russian stocks combined with disruption to French production leaving parts of Europe short. In the US, meanwhile, the Energy Information Administration (EIA) reported that distillate inventories were at their lowest levels since 2008.

Near the end of last month, international conglomerate Goldman Sachs Group said that diesel appears scarce heading into the northern hemisphere’s winter and this will, in turn, push fuel prices higher.

South African impact

While international shortages seem far removed from South Africa, Trollip said we are definitely impacted by them.

“International prices have more than doubled with the oil price going up as it has,” Trollip said.

“Locally, we used to have large oil reserves, but we sold those off. We used to have working oil refineries, but most of them have closed. So we have to import most of the diesel that we use or get it from Sasol.”

However, Trollip noted that while Sasol’s production prices stay the same, the group charges international market prices, so when international prices go up, so do local prices.

Peter Morgan, the chief executive officer of the Liquid Fuels Wholesalers Association, said we are at the whim of global forces and possible delays if shipments encounter problems.

Oil imported to the country is on the water for about three to six weeks sometimes, and it can arrive off-specification or be delayed because of bad weather, to name a few instances, said Morgan.

This increases the risk of supply shortages for all fuel types, including diesel, he said, adding that South Africa’s overreliance on the importation of fuel and its lack of reserves or operational refineries is also worrying.

South Africa’s domestic prices also link directly with the global economy, including fuel sale numbers in countries abroad; stock levels in different markets globally; the behaviour of oil-producing economies (OPEC); and other geo-political issues which can interfere with operations.

Knock-on effects

One of the biggest ways South Africans are affected by rising diesel prices right now is through load shedding.

Trollip noted that Eskom and independent producers currently have around 4,000MW of power on diesel generators. Typically, these are only used in emergencies or when there is a sudden peak in demand, but recently, Eskom has been using these generators non-stop.

He said that as prices increase and supply falls short, the risk of higher stages of load shedding goes up.

The South African supply chain and consumers will also be significantly impacted by growing local prices and increased worldwide demand for fuels, according to the Truck Association of South Africa, AgriSA, and the Road Freight Association.

President of the Truckers Association of South Africa, Mary Phadi, said that higher diesel prices have a drastic effect on the freight industry, its drivers and the businesses that rely on them.

She said that more businesses are going bust as pressure on transporters mounts. This, in turn, affects clients.

The high cost of diesel would likely affect supply chains “for a while”, she said, adding that by the time there is a better price, the industry and customers who rely on diesel-powered transportation will already have suffered losses.

She said if this continues, we could see fewer trucks on the road as it will become too expensive to transport goods.

“Diesel is the fuel source used by most transport companies in South Africa; it is the energy source that drives our logistics chain,” said the Road Freight Association’s CEO Gavin Kelly.

Basically, Eskom and IPPs have 4000MW of diesel generators. Usually they are used when there is a sudden drop in supply or in the evenin peak. But they’ve been using these to supply constant power.

While it is too early in the month to determine what lies ahead for diesel prices in December, the daily snapshots from the Central Energy Fund for the start of the month show prices are already on the back foot.

As of 1 November, fluctuations in international product prices and rand weakness already show an under-recovery of around R1.40 per litre. If these market conditions persist for the rest of November, another steep hike is on the cards for December.

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