Business Reporter.
Economists from the Bureau for Economic Research (BER) say that a weak rand and rising global oil prices are lining South African motorists up for a gut-punch at the pumps in March.
According to the BER, motorists in the country were already looking at a petrol price hike of more than R1 per litre in March by the middle of last week – and market conditions only deteriorated by the week’s end.
The latest available data from the Central Energy Fund points to an under-recovery (thus, increase) of R1.20 a litre for petrol and around 40 cents per litre for diesel.
“Global markets were in risk-off mode last week amid concerns that the continued strength in the US labour market could result in the US central bank keeping their policy interest higher for longer. Geo-political tensions between the US and China also contributed to investor unease.
“As a result, major equity indices ended the week lower, while the US dollar was on a firmer footing versus the euro. Against this backdrop, local financial markets were under pressure, with the rand losing further ground against major currencies and government bond yields ending the week higher,” it said.
The rand has taken a beating over the last week, punched down by a stronger dollar as well as a negative response from markets to president Cyril Ramaphosa’s State of the Nation Address (SONA).
While the president again made promises to resolve the country’s ongoing energy crisis, the measures introduced did not inspire hope or confidence that respite was on the way.
Declaring the energy crisis a state of disaster elicited a cynical response from most commentators, who saw the move a political and also risky in that it could open the country to rampant abuse and corruption – as was the case the last time a state of disaster was declared.
The second major measure to deal with the crisis – appointing a new ‘minister of energy’ within the presidency – was even muddier, with even politicians confused as to what such a role could actually do to resolve the problems. At worst, it is seen as adding even more complexity to the situation, and inserting yet another bottleneck.
Given this cold response and the prevailing global economic conditions, the rand has tanked to R17.91, starting the week on the back foot. At one point the local unit seemed like it was eyeing R18 to the dollar.
Regarding major commodity prices, it was a poor week for precious metals, while the recent extreme volatility in the oil price continued, the BER noted.
“After already moving higher earlier in the week, Brent crude rose by more than 2% on Friday after Russia said it would cut oil production by 500,000 barrels a day in March. This move retaliates against western energy sanctions but will arguably harm Russia the most as it will reduce the country’s export revenue.
“Importantly, delegates from the OPEC oil grouping signalled that they will not take any action to fill the void created by Russia’s cuts.
Oil is currently trading at around $86 a barrel. In the near term, analysts project that prices will remain range-bound, but anticipate that prices will approach $100 a barrel by mid-year. In either scenario, however, this is bad news for local fuel prices.
“Even before Friday’s adverse oil and rand moves, the under-recovery on the domestic petrol price was more than R1/litre, implying that a sizeable fuel price increase is on the cards for March,” the BER said.
Oil prices, even at current range-bound prices, are contributing most to the under-recovery.