Good news for petrol prices in June

Despite the rand buckling under the pressures of load shedding, a big drop in global oil prices is signalling a significant drop in prices for both petrol and diesel in June.

According to the latest data from the Central Energy Fund, on the same day the rand hit its weakest point against the dollar in three years, local fuel prices were still showing a sizeable over-recovery.

If current market conditions persist to the end of the month, motorists will be in line for a petrol price drop of around R1.20 per litre, while diesel could come down by as much as R1.60 per litre.

The main driver behind the over-recovery is the global oil price, which tanked in May to around $77 a barrel – much lower than the $86 per barrel price point that stuck in April.

Oil prices have swung wildly in 2023, pushed back and forth by competing narratives around global demand and supply.

Most recently, crude oil has weakened as worries over the US Fed’s tightening path and a potential US recession outweighed the boosts from a surprise output cut by the Organization of Petroleum Exporting Countries and its allies (OPEC+), as well as a US plan to refill strategic reserves, Bloomberg analysts said.

Put more plainly, concerns over global growth and talk of recession in major markets dampen demand, lowering prices. OPEC+ nations have tried to counter this by cutting supply, pushing prices higher.

While this plays out, various geopolitical events – such as Russia’s war in Ukraine – and natural disasters like wildfires are also in the mix.

Market conditions favour lower oil prices for now, but things can change quickly, as recent months have shown.

According to Bloomberg, oil prices are already swinging upwards as traders assess inflation trends in major economies and halts to oil supplies.

Much like the oil price, South Africa’s rand versus the dollar is also at the whims of global markets – although domestic issues like load shedding are still significant factors.

On Wednesday (10 May), the rand hit a three-year low against the dollar, and came worryingly close to flirting with its worst levels ever. Market commentators struggled to pinpoint the exact reason for the sudden crash, but pointed to narratives around imminent grid collapse as a major factor.

Power utility Eskom has been struggling to keep load shedding at bay, with 2023 already being the worst year on record and alarm bells ringing over worse to come in the next few months due to winter demand.

While energy experts have warned that load shedding will get worse, there is some consensus that a grid collapse is not expected. However, this has not put investor worries at ease, and risk bodies, finance groups and insurers have all started including such an eventuality within their risk models.

Because of the high risks involved with doing business in South Africa, investors are steering clear.

According to Investec chief economist Annabel bishop, investors sold a total of R11.4 billion in South African bonds for this year to date, and this has further had a negative effect on the rand.

South Africa’s ‘real return’ on interest rates is low and not attractive to investors comparatively, adding to the rand weakness, said Bishop.

Despite the rand’s weakness, however, this is not enough to reverse the benefits to local fuel prices from the lower oil price.

Lower oil prices are currently contributing to an over-recovery of 134 to 137 cents per litre for petrol, and 163 to 174 cents per litre for diesel. Meanwhile, the weaker rand is creating an under-recovery of just 15 to 16 cents per litre.

The Department of Mineral Resources and Energy announces the official petrol price changes before they come into effect on the first Wednesday of a new month.

Read: Rand drops to 3-year low

Good news for petrol prices in June