Trouble ahead for diesel in South Africa

[Nat Quinn]

South African motorists are on track for petrol price relief in July – but diesel prices are going the opposite direction.

Households and consumers have been presented with some good news this week, with Stats SA showing that consumer inflation is easing quicker than anticipated by the market.

The inflation print for May 2023 came in at 6.3%, down from 6.8% in April. Economists expect this trend to accelerate, falling back into the South African Reserve Bank’s target range by the end of the year.

The eased inflation has been primarily driven by food and fuel prices, which have come down from record highs in recent months.

Notably, May’s inflation figures are lower despite it being a month when fuel prices increased. Fuel prices dropped in June, making another decline in CPI more likely.

According to Investec chief economist Annabel Bishop, motorists are on track for a petrol price drop in July – which again bodes well for the inflation outlook.

However, the latest data from the Central Energy Fund shows that this isn’t the case for diesel.

The CEF points to petrol prices dropping between 8 and 16 cents per litre.

Diesel, meanwhile, is currently showing an under-recovery of around 13 to 18 cents per litre, pointing to a price hike next month.

This will add upward pressure to inflation – both from a household expenditure perspective (as consumers spend more to fill up their diesel vehicles and the generators for evening load shedding) and from a producer price perspective.

Diesel is used extensively in production in South Africa – from fuelling the vehicles used in agriculture, logistics and other industries to billions of rands spent on the fuel to keep production going during power outages.

These costs have escalated since 2022 and are often passed onto consumers through pricing.

While the daily snapshots from the CEF gives the picture for ‘right now’, it indicates the general direction pricing will follow.

Barring any massive disruptive force – like a sudden crash/strengthening of the rand or a global event that impacts oil prices – the market conditions are likely to persist until the end of the month when the Department of Mineral Resources and Energy does its review.

Contrary to previous months, the rand/dollar exchange rate is the only positive force pushing local fuel prices lower.

The rand recovered significantly in June, dropping from record highs at R19.92 to the dollar to settle around R18.30.

The local unit has been boosted by improved sentiment towards South Africa and better-than-expected economic data, like the latest inflation figures. A welcomed pause to high stages of load shedding – where outages are suspended altogether for most of the day – has also improved sentiment.

Global factors have also helped. The US Fed has paused interest rate hikes, softening the dollar and boosting emerging markets. South Africa’s geopolitical tensions related to Russia have also eased somewhat – though investors remain cautious.

It’s global oil prices, then, that are pushing local fuel prices higher.

Oil has remained fairly rangebound for some weeks, having fallen from $85 a barrel in April/May to around $75 a barrel in May/June. However, prices have slowly edged higher as market concerns creep in.

According to Bloomberg analysis, markets are being cautious around the Fed’s interest rate pause, with some indications that hikes may continue later in the year.

Oil demand from Asia is also climbing, it said, while supply data is yet to be published. Indications are that there may be a drop in supply, supporting higher prices.

“Oil has declined this half even as China, the largest crude importer, has taken steps to shore up its economy after a disappointing recovery since ditching its restrictive Covid Zero stance. To try to arrest the slide, the Organization of Petroleum Exporting Countries and its allies have agreed to curb production.”

Locally this translates to higher prices for petroleum products, which is reflected in the under-recovery for almost all fuel types in the country.

 

SOURCE:Trouble ahead for diesel in South Africa – BusinessTech

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