As motorists brace for another hike in petrol prices next week Wednesday, with some relief provided for diesel users, fuel prices are likely to see a decrease in the new year.
This is according to Jalpa Bhoolia, Investment Analyst, and Koketso Mano, Senior Economist at FNB Wealth and Investments.
The pair said that oil prices have been declining for most of November, amid several bearish factors.
The factors include escalating fears over a global economic slowdown in the wake of tighter monetary conditions to combat inflation and continued protracted Covid-19 lockdowns in China, the world’s biggest crude oil importer.
The rand’s recent strength has also provided some support to fuel prices locally.
According to the data on 28 November 2022 from the Central Energy Fund, the price of diesel is set to decrease by R1.48/litre, while 93 and 95 octane petroleum are expected to increase by 30c/litre and 41c/litre, respectively.
This means the average logistics vehicle with an 80-litre diesel tank will cost R118.40 less to fill up, and 93 and 95-octane petrol tanks will cost an additional R24.00 and R32.80, respectively.
Diesel and petrol prices are tightly linked to brent crude prices and the rand exchange rate, but the growing divergence between the two over the past few months has been notable.
“Diesel has been in short supply for a while, and given its universal uses, markets have scrambled towards the precious liquid, pushing prices higher relative to petrol,” Bhoolia and Mano said in a statement on Friday.
“The divergence we are seeing this month was driven by an under-recovery in the petrol price and a large over-recovery in the diesel price by the Central Energy Fund. While the petrol price increase is discouraging, the magnitude of the increase is lower than initial expectations,” the pair further said.
How fuel prices are calculated:
Basic Fuel Price: The basic fuel price makes up roughly 42% of the total price of fuel. The Basic Fuel Price is made up of the purchase price of fuel (in US 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 two main factors: the Rand/US Dollar exchange rate (how fuel is purchased) and international petroleum prices (how much the fuel costs to purchase).
The General Fuel Levy (GFL): The GFL makes up roughly 23% of the total price of fuel. The GFL goes to National Treasury. Government is free to utilise this levy in whichever way it deems fit.
Road Accident Fund (RAF) Levy: The RAF levy makes up roughly 13% of the fuel price. These funds can only be utilised for road accident claims.
Wholesale and retail margins as well as distribution and transport costs: The final contributors to the gross petrol price are those costs associated with transport and storage, custom and excise duties and retail margins for fuel station owners and makes up roughly 22% of the total fuel price.
SA consumer considerations:
Motor vehicle running costs: Vehicle owners will immediately feel the impact and will be paying more to fill up an average 45-litre petrol tank.
It will now cost R1029.15 (+R13.50) for 93 and R1047.60 (+R18.45) for 95.
There will be some relief for diesel vehicle owners, who will now pay R1080.45 (-R66.60) for diesel 0.05% and R1083.15 (-R63.90) for diesel 0.005%.
Transport costs: A decrease in fuel prices means lower costs for companies to operate bus services (diesel) which could lead to a stabilisation in rates. However, taxi service (petrol) fees may increase further. Higher fuel costs are generally passed on to consumers, but a decrease may not necessarily mean that transport costs will follow suit.
Consumer goods: The significant drop in diesel is good news as most trucks utilise diesel, and this could mean lower prices on store shelves.
Investment considerations:
Consumer stocks will be impacted positively on account of lower diesel prices.
Lower diesel costs could translate to end-user price stability or deflation, positively impacting company profitability.
On the flip side, interest rates and slowing economic growth may further erode consumers' capacity to spend.
Industrial stocks will also benefit.
If the previously higher costs have been passed on to end-users, the company will likely see a margin expansion off the back of lower diesel costs incurred (likely in transport and energy costs as many companies now utilise generators during periods of load shedding).
Inflation:
Lower fuel prices may lead to lower inflation and smaller increases or an eventual stabilisation in interest rates. Stable interest rates are neutral for most asset classes.
An eventual cut in rates will be positive for equities, generally positive for the bond market but negative for cash (although lower inflation may still see positive real returns on cash instruments).
Oil stocks:
A decrease in fuel prices may have a negative effect on oil stocks such as Sasol.
To offset the impact of falling value on your investment portfolio, it is worthwhile to consider a tilt in favour of ETFs and direct exposure into areas of the market that benefit from lower fuel costs but that are not too susceptible to slowing economic growth.
These include defensive areas of the market such as Tobacco, Food Producers and Food Retailers.
Outlook:
The driving forces for oil prices remain consistent. Supply remains constrained, and OPEC+ recently cut production targets to support oil prices and may be willing to take further steps to support prices as a global activity slowdown unfolds.
Global refinery production remains tight and geopolitical risks are still heightened. On the demand side, constrained demand from China is expected to persist near-term as the country grapples with its Covid-zero policy, and demand could also be impacted by slowing global growth as the impact of rising interest rates continues to filter through.
For the rand, the US Federal Reserve is expected to hike rates by an additional 50bps by the end of the year, which could weigh on the rand, which has recently strengthened.
Further weakening of the rand may place some upward pressure on local prices.
“We expect fuel prices to gradually ease over the next year but to remain above pre-pandemic levels and subject to unfolding risks to international oil prices and the exchange rate,” the two further said.
BUSINESS REPORT