Good signs for petrol prices in South Africa

An anticipated strengthening of the rand and slipping global oil prices could result in lower petrol prices at the pumps next month.

The Department of Mineral Resources’ Central Energy Fund (CEF) provides daily updates on the expected fuel price adjustments implemented every month.

The adjustments are based on changes in the basic fuel price and the rand’s exchange rate against the US dollar during a review period over the preceding month.

At the start of July, CEF data on fuel prices suggested that a significant petrol price reduction was in store for South African motorists in August 2024.

On 1 July 2024, unleaded 95 and unleaded 93 petrol showed overrecoveries of 71 and 75 cents per litre, respectively. An overrecovery means that a fuel price is set for a cut.

As of 15 July 2024, those overrecoveries had shrunk to just 7 and 4 cents per litre.

The current trajectory points towards a switch from overrecovery to under-recovery, which would result in petrol price hikes rather than reductions.

However, the latest trends in the two biggest factors influencing South African fuel prices suggest that the overrecoveries could be sustained or increased again in the second half of the review period.

The main factor impacting the change in outlook over the first half of the month was a big jump in oil prices in the first week of July.

The price per barrel of Brent Crude oil surged from around $85 to more than $87 before retreating below its previous levels in the second week of the month.

That meant the roughly 48 to 53 cents overrecovery in petrol prices contributed by the basic fuel price at the start of the month was converted into an under-recovery of about 10 to 13 cents per litre.

The graph below shows how the basic fuel price changed over the last two months, with the peak price observed in early July.

Oil prices again declined on Tuesday, 16 July 2024 due to persistent concerns over slowing Chinese economic growth.

The world’s second-largest economy grew only 4.7% in the second quarter of 2024, the slowest rate since early 2023 and well below economists’ expectations.

The other factor impacting the drop in the overrecovery has been the movement in the dollar-to-rand exchange rate.

Crude oil and petroleum are primarily sold in US dollars, so this exchange rate plays a major role in how much South Africa pays for upstream supply.

At one point during the period under review, the rand had strengthened to around R17.94 following the appointment of President Cyril Ramaphosa’s cabinet.

The executive includes a mix of representatives from the Government of National Unity, which has boosted investor sentiment.

However, the currency dropped to about R18.60 to the dollar following news that the ANC and DA had failed to reach common ground on a Government of Provincial Unity in Gauteng, South Africa’s economic hub.

It quickly recovered but has again weakened against the US dollar in recent days due to risk aversion following the attempted assassination of US presidential candidate Donald Trump.

Rand recovery on the cards

However, Investec chief economist Annabel Bishop expects the rand to pull back towards R18.00 to the dollar during the course of the week following the FBI’s finding that there was no further safety threat related to the incident.

“With the US shooting seen to be an isolated instance so far, risk aversion is expected to wane over the course of this week,” Bishop said in her most recent rand note.

Bishop also said that speculation about interest rate cuts by the US’s Federal Open Market Committee could have an impact on the rand’s strength.

Although no interest rate cuts are anticipated in July, the FOMC’s next meeting to discuss potential adjustments is set to take place on 31 July.

Its commentary could provide an indication of US Federal Reserve interest rate cuts in September or October.

The interest rate cut decreases the cost of borrowing and can boost economic activity as well as oil demand.

However, Bishop said a cut in interest rates in September would likely also prompt rand strength.

The table below shows the expected changes in the prices of petrol and diesel based on the latest CEF data.

It should be emphasised that the expected prices are subject to change based on trends in fuel prices and the dollar-to-rand exchange rate over the next two weeks.