Bad signs for petrol prices in South Africa

Recent Central Energy Fund (CEF) data shows that nearly 90 cents of the over-recovery in petrol prices has been wiped out in the space of a week.

While an overrecovery indicates that fuel prices will drop in the coming month, the sudden swing in overrecovery is concerning and could spell bad news for petrol prices.

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

On 27 September 2024, unleaded 95 and unleaded 93 showed overrecoveries of 140 and 133 cents per litre, respectively.

However, by 4 October 2024, the overrecoveries had shrunk to 56 and 62 cents per litre, respectively.

The trajectory indicates that a shift from overrecovery to under-recovery could be on the horizon, which would result in petrol price hikes.

The sudden shift is likely due to surging oil prices resulting from the Israel-Iran conflict. Trading Economics data shows that Brent crude oil was priced at just under $71 (R1,232) per barrel on 26 September 2024.

Prices quickly rose to around $79 (R1,371) per barrel by Monday, 7 October 2024.

According to a Bloomberg analysis of the oil market, oil erased its earlier losses as the market waited to see if Israel would retaliate against Iran’s missile attack last week.

Concerns over all-out war following Iran’s attack led to a flurry of actions in the options market, and the barrel price of crude surpassed $78 (R1,361) at one point as a result.

While Iran’s oil output has almost returned to full capacity, it could be vulnerable as tensions escalate.

US President Joe Biden is discouraging a retaliation strike on Iran’s crude fields. On Friday, 4 October, Biden said he didn’t know when an Israeli response would come.

“I’d be thinking about other alternatives than striking oil fields,” he added.

Another factor impacting the drop in overrecovery is changes in the dollar-to-rand exchange rate over the past week.

Crude oil and petroleum are primarily sold in US dollars, so this exchange rate significantly affects the amount South Africa pays for upstream supply.

The rand had strengthened significantly to R17.09 to the dollar as of Sunday, 29 September 2024.

However, it weakened the following week, reaching R17.49 to the dollar on Sunday, 6 October.

It has since recovered slightly to R17.36 to the dollar.

Investec chief economist Annabel Bishop expects the rand to strengthen to around R17.20 to the dollar in the fourth quarter of 2024 due to improved economic activity and reduced political risk in South Africa.

“In South Africa, improving economic activity has also had a positive effect on the domestic currency, along with the reduction in political risk on the formation of a centrist government, and increased foreign appetite for SA’s portfolio assets,” said Bishop.

“The substantial movement in the rand since the US interest rate cut this month has brought it towards R17.70/USD more quickly than a 25 basis point US cut would have done, and Q4 24 is therefore likely to be significantly stronger, at R17.20/USD than Q3 24.”

She noted that the rand had strengthened quickly over the past couple of weeks due to the surprise 50 basis points interest rate cut by the US Federal Reserve.

Bishop expects the rand to strengthen further during the US interest rate cut cycle.

“Markets expect US rate cuts to end in H2.25 and are also eyeing the possibility of further -50bp cuts in the US interest rate cutting cycle,” she added.