Petrol prices in South Africa recently saw a 37 cents per litre increase for May, and analysts suspect this will not be the last.
Jalpa Bhoolia and Koketso Mano, an investment analyst and senior economist, respectively, at FNB Wealth and Investments, project the trend in petrol prices to worsen over the remainder of the year.
The two expect worse to come – however, prices should remain below post-lockdown highs, and the volatility in international markets should keep the outlook fluid, they said.
As of the latest announcement by the Central Energy Fund, 95 petrol will cost around R23.34 per litre, up from R22.97, and diesel will cost R20.15 per litre, down from R20.89 the month before.
According to FNB, the latest announcement resulted from weakness in global growth and higher lending standards following bank sentiment fallout – contributing to a more risky economy overall.
“While motorists cheered a fuel price decrease in April, the outlook was more complicated for May,” said FNB.
In response to the risk of weaker economic activity and lower oil demand, the oil producer group and its allies, OPEC+, have shown a willingness to support prices through production cuts, FNB said.
“However, production cuts have so far managed to only support prices and have not driven the kind of rally that would test 2022 highs.”
FNB added that the surprising increase in oil prices at the start of April was due to an unexpected OPEC+ supply cut. The oil group cited the following as the reasons for a reduction in planned production:
- Market instability
- Persistently weak demand
- Growing recessionary fears
- The analysts said that the difference between the prices of petrol and diesel have been notable in recent months, with diesel demand suffering due to weak global economic activity.
When looking more long term, the International Monetary Fund (IMF) has marginally downgraded its growth projection for the global economy from 2.9% in January to 2.8% in the April World Economic Outlook.
Global growth slowed from 3.4% in 2022, and tighter lending standards following multiple bank failures could dampen growth more.
Responding to the risk of weaker economic activity and lower oil demand, the oil producer group OPEC+ has shown a willingness to support prices through production cuts.
FNB said that the US Federal Reserve is expected to hike interest rates again by 25 basis points in May, and the European Central Bank (ECB) could go even further to reign in wage growth.
“Rising real rates in these advanced economies, while South Africa’s current account falls into deficit territory and local structural constraints mount, should continue to weigh on the rand and worsen local price pressures,” FNB said.
How fuel prices are calculated:
The basic fuel price makes up 53% of the total price of fuel over the past three months.
According to FNB, the basic fuel price is made up of the purchase price of fuel (in dollars) as well as freight costs, insurance, storage and financing.
In South Africa, the fuel price is adjusted on the first Wednesday of every month and is determined by the following two main factors:
- The rand/dollar exchange rate
- International petrol prices
Within the total price of fuel domestically, taxes and levies make up 31%, with the General Fuel Levy and Road Accident Fund Levy accounting for the largest portion.
“The GFL goes to National Treasury, and the government is free to utilize this levy in any manner it deems fit. The RAF levy can only be utilized for road accident claims,” FNB said.
Wholesale and retail margins, along with distribution and transport costs, are the last factors that determine the gross petrol price. These costs include expenses related to transportation and storage, as well as retail margins for fuel station owners, and makeup about 15% of the total fuel price in the past three months.
FNB said the divergence seen in May was driven by an under-recovery in the petrol price and an over-recovery in the diesel price by the CEF.
An over-recovery happens when consumers pay more than they should for the product on a day, while an under-recovery means the opposite, said FNB.
The CED accumulates the daily over and under-recovery values over the month, and the final excess or shortage amount is then incorporated in the pump price.
Source: Bussinestech
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