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The global collapse in oil prices may provide fuel price relief for South Africans, but there are currently too many moving parts to know exactly how much additional cash motorists may have in their pockets when prices adjust again.
Oil prices are falling across the board due to a combination of the global slowdown in economic activity caused by blockages in response to the Covid-19 pandemic and tensions between the oil-producing countries of Saudi Arabia and Russia. According to an analyst, global fuel demand has dropped to 29 billion barrels per day, compared to about 100 billion barrels per day when the world economy was operating at full capacity a year ago.
On Monday night, the price of West Texas crude oil (WTI) fell below $ 0 for the first time in history. Bloomberg reported that the price of WTI futures contracts fell to $ 37.63 a barrel, before expiring on Tuesday. Essentially, there is limited storage space for the amount of oil available, and storing it costs money.
South Africa is more dependent on oil imports from the Middle East and North Africa than WTI.
“For South Africa we use a basket of oil prices, to set the price of fuel … For SA fuel prices, the price of Brent crude is more important than WTI,” said Annabel Bishop, chief economist at Investec.
On Tuesday morning, the WTI price had stabilized at a positive level of $ 1.65 per barrel, still a long way from what it was a day ago. In comparison, Brent crude was trading at around $ 25.42.
A storage problem
Lower oil prices could be an opportunity for South African companies to source oil, but there is also a storage problem. There are not enough onshore facilities available to store oil, and storing oil by sea is extremely expensive, RMB analyst Matete Thulare said.
Since the price of Brent crude is still below $ 30 a barrel, consumers can expect another cut in the price of fuel, down from R2 / liter in May, Bishop said. The Department of Energy implemented a cut in fuel prices of just under R2 / l in April, driven by the oil price war between Saudi Arabia and Russia and the initial impact of Covid-19.
Changes in the price of oil will also influence the inflation outlook. In the most recent statement by Banco de la Reserva SA’s Monetary Policy Committee issued in April, it said lower oil prices, coupled with slower growth, had lowered the inflation forecast. However, the depreciation of the rand can drive inflation upward. The Reserve Bank expects weaker inflation in the short term, followed by higher inflation much later. Inflation is still expected to remain within the target band of 3% to 6%.
So far, the Reserve Bank has cut interest rates by 200 basis points this year, and Thulare expects another 50 basis points in the coming months. According to the Reserve Bank, the first 100 bp cut resulted in an estimated R32 billion cash flow to the economy.
But with the arrival of new data weekly, economic indicators will have to be continually revised, Thulare said.
Next week, the World Government Bond Index is due to rebalance its portfolio, a rebalance that was delayed until the end of April due to the volatility in the market caused by Covid-19.
South Africa, which lost its last remaining investment grade credit rating in late March, will be left out of the index. Originally, capital outflows were estimated to be around $ 11 billion, but Thulare said it is now projected to range from $ 2 billion to $ 14 billion, with implications for the rand exchange rate.
A weaker exchange rate will raise the cost of imports, which is likely to be passed on to consumers, offsetting possible relief from the reduced price of oil.
Monday’s rand remained fairly stable amid falling oil prices. It opened at R18.88 on Tuesday, slightly weaker than the previous day’s close and is expected to remain within the range of R18.50 / $ and R19. At 11:17 a.m.Tuesday, it was trading more than a percent weaker at R19.04.
