Good news for petrol prices in South Africa looks to continue
November is off to a good start for fuel prices – the new month is kicking off squarely on the front foot when it comes to price recoveries.
According to early data from the Central Energy Fund, petrol and diesel prices are starting the month showing a significant over-recovery in prices.
Petrol is currently showing an over-recovery (thus expected decrease) of around R1.60 per litre, while diesel is sitting close to an over-recovery of R1.90 a litre.
While the start of the month is far too early to make a solid call, having fuel prices start the month with a sizeable over-recovery greatly increases the chance of seeing prices drop or stabilise in December.
For example, October also started off with significant over-recoveries and ended the month with a big drop in both petrol and diesel prices, despite the oil market turmoil driven by the Hamas-Israel war and a weaker rand.
Petrol prices were cut this week (Wednesday, 1 November) by R1.78 per litre, while the wholesale price of diesel came down by between 82 cents and 85 cents per litre.
For November’s start, South Africa is on solid footing on both fronts, with both the global oil price showing a pullback and the rand sitting stronger thanks to a positive reception to the budget and an indication that the US interest rate hiking cycle is at an end.
With the rand stabilising around R19 to the dollar for almost two months, oil remains the biggest contributing factor to fuel price fluctuations locally.
After the Hamas-Israel war broke out in early October, markets panicked and oil prices shot up significantly, raising concerns that fuel prices (and inflation) would follow suit. This is because the war risked pulling in other Middle Eastern nations, including Iran and Suadi Arabi – big oil produces.
However, according to Bloomberg analysis, markets have hit some relative calm, and oil is set for a second weekly loss as the war remained contained and clouds appeared on the demand horizon.
Global benchmark Brent held near $87 a barrel amid dollar weakness and hints the US Federal Reserve is done with tightening.
However, analysts have warned that the market is not yet in the clear. Israel has indicated that a cease-fire is not on the table, and there are still risks the conflict could spread and affect oil markets with Iran and Saudi Arabia still waiting in the wings.
This pushes the risk profile for the month ahead into more volatile territory.
“Crude has mostly given up its war premium as the conflict hasn’t endangered supplies from the region, the source of about a third of the world’s oil,” Bloomberg said.
“That’s brought demand concerns back to the fore. Factory activity in China, the biggest importer, moved back into contraction last month, according to data released this week, while US fuel demand remains low and crude stockpiles are rising.”
The rand is also currently contributing to an over-recovery largely thanks to its stronger position at R18.40 to the dollar.
The local unit came out stronger this week thanks to finance minister Enoch Godongwana delivering a relatively “credible” medium-term budget policy statement on Wednesday.
While the country’s mounting debt remains an eyesore and major concern for investors, the government’s stated commitment to budget cuts and other measures to close the project budget deficit was welcomed.
The rand also strengthened on news that the US Fed would not hike rates, which tempered markets and delivered some risk-on sentiment.
While these market conditions are true for now, history has shown that things can change rapidly, and markets can crash in an instant. However, it would still take quite a significant swing to push the over-recovery into an under-recovery (price hike) space.
A clearer and more predictable path for fuel prices can be determined in the latter half of the month.
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