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Early indicators point to sharply higher fuel prices next month

The IEA said the world oil demand hit a record 103 million barrels per day in June, and August could see yet another peak. Photographer: Armand Hough, African News Agency(ANA)

The IEA said the world oil demand hit a record 103 million barrels per day in June, and August could see yet another peak. Photographer: Armand Hough, African News Agency(ANA)

Published Aug 14, 2023


Fuel prices in South Africa could increase dramatically over the next month, possibly pushing consumer inflation back above the upper limit of the target range, as the global demand for oil is expected to reach an all-time high.

This comes as the International Energy Agency (IEA) on Friday revised upwards its forecast for global oil demand growth in 2023, which could also potentially push prices even higher.

In its August report, the IEA said demand was “scaling record highs” on the back of a sharp reduction by oil producing countries such as Saudi Arabia and Russia.

The IEA said the world oil demand hit a record 103 million barrels per day in June, and August could see yet another peak.

“World oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity,” it said.

“Global oil demand is set to expand by 2.2 million barrels per day to 102.2 million barrels per day in 2023, its highest ever annual level, with China accounting for more than 70% of growth.”

The IEA also said global oil prices moved steadily higher during July and into early August, reflecting a market tightening as deepening OPEC+ supply cuts collided with improved macroeconomic sentiment and all-time high world oil demand.

In July, oil supply from the OPEC+ alliance fell by 1.2 million barrels per day to a near two-year low as a voluntary reduction from Saudi Arabia came into effect.

OPEC indicated an expectation for global oil demand to grow by 2.25 million barrels per day in 2024, slightly less than the projected 2.44 million barrels per day increase for the current year.

However, the IEA revised downwards its 2024 global oil demand growth to 1 million barrels per day from 1.15 million barrels per day previously.

“With the post-pandemic rebound running out of steam, and as lacklustre economic conditions, tighter efficiency standards and new electric vehicles weigh on use, growth is forecast to slow to 1 million barrels per day in 2024.”

Meanwhile, early month data released by the Central Energy Fund (CEF) pertaining to the first 10 days of August indicates that significant petrol and diesel price increases were looking likely for September.

The latest daily snapshot from the CEF shows the price of 95 Unleaded petrol could go up by around R1.26 per litre at the beginning of next month, while diesel might increase in the region of R2.50 per litre.

However, with the current daily numbers being in the red to the tune of around R2 per litre for petrol and R3 for diesel, the month-average could increase well beyond the aforementioned predictions.

Sequoia Capital Management’s consulting economist Chris Harmse said the combination of the strong increase in the oil price, as well as the sharp depreciation in the rand, were sad news for the fuel prices at the beginning of September.

“At this stage, the price for 95 is already R1.26 per litre under recovered and the price for diesel is under recovered by R2.52 per litre. This may increase even more if the trend of oil price increases and the depreciation in the rand continue,” Hamse said.

“The effect on the inflation will be devastating and may lead to more than one further interest rate hike before the end of the year. The sharp increase in the international oil price is expected to push the US economy eventually into a recession.”

Fuel prices, which are mainly determined by the fluctuation in global oil prices and the rand exchange rate, are one of the main drivers of consumer inflation in South Africa, since the country is a net-importer of crude oil.

Annual headline inflation in South Africa cooled to 5.4% in June from 6.3% in May, sinking below the upper limit of the South African Reserve Bank’s (SARB) monetary policy target range of 3-6% for the first time since April 2022.

This allowed the SARB to pause hiking its benchmark lending rate at 8.25% per annum after 10 consecutive increases in July, for the first time since its hiking cycle began in November 2021.

Absa senior economist Miyelani Maluleke said headline inflation was likely to ease further but uncertainty remained high.

Maluleke said they expected headline inflation to ease further, reaching 5% by December 2023 and averaging 4.8% in 2024, partly driven by further moderation in food and core inflation.

“We believe the SARB’s hiking cycle has ended and that the next move will be down. We expect the SARB to cut rates from March next year,” Maluleke said.

“However, with global interest rates likely to remain higher for longer and South Africa gradually becoming a riskier investment amid weak growth and deteriorating public finances, we now expect a terminal repo rate of 7.50% compared with our previous forecast of 7.00%.”