Robust rand could buffer expected petrol price hike

Cape Town - If the rand remains stable against the dollar over the next few weeks, consumers could see a smaller than expected increase in the fuel price in August than the data currently suggests, Jana van Deventer, head of financial markets at ETM Analytics, told Fin24 on Monday.

She pointed out that based on the latest data from the Central Energy Fund (CEF), it seems consumers could face a fuel price increase of 8 cents per litre in August. This is as a result of the weaker average rand/dollar exchange rate, which fully offset lower international oil prices, she explained.

The price of petrol decreased by up to 69c a litre at the beginning of July, while the price of diesel dropped by 60c. The Department of Energy (DOE) cited the strengthening of the rand against the dollar as the main reason for the decrease.

This followed a petrol price breather of 25c a litre in June after it increased 30c a litre in May.

"Even if we do see the fuel price increase in August, fuel prices are still relatively low compared to earlier this year and it is unlikely that this will exert too much pressure on SA consumers," said Van Deventer.
"Through the course of the next two weeks we will closely monitor the rand exchange rate as ongoing rand resilience might help reduce the under-recovery on the basic fuel price."

At 13:40 the local unit was trading 0.625 firmer at R12.95 to the greenback.

According to Sanisha Packirisamy, economist at Momentum Investments, the CEF’s data shows the current under-recovery at 8c/l on 95 grade fuel prices.

"The dollar oil price amounted to a 9c/l over-recovery - due to lower international oil prices on a month-to-date basis - while the rand depreciation contributed to a 17c/l under-recovery. The rand weakened in the first half of July 2017 on proposals to review the SA Reserve Bank’s mandate," she told Fin24 on Monday.

"Currently international oil prices are reflecting sideways demand, an overhang in oil inventories and increasing supply."

Packirisamy explained that the deal brokered by the Organisation of the Petroleum Exporting Countries (OPEC) essentially failed to prop up oil prices as the agreed-upon production cuts were made after supplies were ramped up significantly - cuts from a high base - while US shale producers are ramping up supply as current prices remain in excess of their break-even rates.

"Moreover, Nigerian and Libyan supply is increasing at the margin. As such, we are not expecting a major move higher in international oil prices over the next year, given the relative supply overhang. Nonetheless rand volatility, thanks to domestic political and ratings concerns, could exert pressure on domestic petrol price inflation in upcoming months," she added.

Earlier on Monday the Automobile Association (AA) said higher international fuel prices and a weakening rand/dollar exchange rate have increased the likelihood that motorists will pay more at the pumps at the end of July, based on unaudited mid-month fuel price data released by the CEF.

"There was a slight decrease in the international petrol price, but diesel and paraffin are up. Meanwhile, the rand's slip against the dollar added around 17 cents a litre to fuel prices across the board," the AA said.
"As a result, our mid-month prediction is that the petrol price is set to increase by up to 7c a litre based on the current data, with diesel up 22c, and illuminating paraffin 19c higher."

The AA said international petroleum product prices have generally trended towards higher prices during July, while the exchange rate picture trends towards weakness. That is why the AA cautioned that a continuation of these trends can cause even higher fuel price hikes by month-end.

The Department of Energy said it cannot comment on what the petrol price may do at the end of July.

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