The main driver behind the lower projected prices is a huge drop in the international product prices for petroleum, which are guided by global oil movements. This is being supported by a stronger rand versus the US dollar.
Global oil prices have dropped below $80 a barrel so far in January, ending last week over 8% lower. The drop in prices was largely driven by market sentiment around demand, with analysts holding a dim outlook for demand coming from industrious nations like China – while supply concerns eased.
According to Bloomberg analysts, however, the trend may be shifting. China has reopened its borders, and its central bank has pointed to the country getting “back on track” from its zero-Covid approach.
Meanwhile, OPEC+ nations are still supporting higher oil prices by limiting production. This means the oil outlook, at least for the medium term, is more balanced, the analysts said.
“It will take some time before the impact of China’s reopening of borders can be felt,” said Sean Lim, an analyst at RHB Investment Bank Bhd in Kuala Lumpur. “Concerns over soft demand remain, but OPEC+ should still be a major price support. We expect a more balanced oil market in the medium term.”
For now, oil prices are supporting a cut in local fuel prices, contributing between 68 to 142 cents per litre to the projected cut.
On the rand front, the local unit has remained around R17.00 to the dollar in the past week, largely driven by sentiment around the greenback.
Ahead of the US Fed’s minutes last week, the rand strengthened to below R17 to the dollar, with markets looking for any indication that the reserve would ease up on interest rate hikes. However, the minutes showed that rate hikes would continue, albeit at a lighter pace, which soured risk-on sentiment.
Meanwhile, surprisingly positive US jobs data also boosted the dollar – weakening the rand in return.
“Markets are now wary that the US payrolls number could also be above estimates which could see a more hawkish Fed,” said TreasuryOne in a note.
The Fed and other major central banks – including South Africa – have been using interest rate hikes to try and curb rising inflation. Following a string of 75bp hikes, indications are that the hike-cycle will continue, but at a slower pace of 50pbs or lower.
The South African Reserve Bank is also expected to continue hiking rates, at least in the near-term, with economists pencilling in a 25bps hike for the 26 January meeting.
Also factoring into the rand’s movements was the Purchasing Manager’s Index (PMI) for December, which carried a cautiously optimistic tone for businesses – but highlighted the grim reality of continued and elevated levels of load shedding in the country.
Despite the volatility, however, the rand/dollar exchange rate is still making a positive contribution to the local fuel price, accounting for between 13 and 16 cents per litre to the projected cut.
The price forecast is as follows:
- Petrol 93 & 95 will drop by 87 cents per litre
- Diesel 0.05% will drop by R1.42 per litre
- Diesel 0.005% will drop by R1.58 per litre
- Paraffin will drop by R1.12 per litre