Fuel prices in South Africa are poised for an increase next month due to rising oil demand in the United States. However, a strong rand might offer some relief to motorists.
South Africans have enjoyed two consecutive months of fuel price cuts, with petrol prices dropping by over R2 per litre and diesel prices falling by just below R1 per litre. Unfortunately, this trend is unlikely to continue as oil demand picks up and major producers limit their supply to keep prices high.
Investec Chief Economist Annabel Bishop noted that the Brent crude oil price has risen above $87 per barrel this month (R1,587/barrel), compared to June’s average of $82.9/barrel (R1,523/barrel). According to the Daily Investor, Bishop explained that this increase is due to expectations of higher demand and supply concerns stemming from rising tensions in the Middle East.
In the US, the summer driving season significantly boosts fuel demand, driving up the commodity’s price. Bishop expects oil prices to remain elevated as this trend continues across the Northern Hemisphere.
The US Energy Information Administration (EIA) reported a larger-than-expected drawdown on US oil inventories, adding to the recent price pressure. US banks, including Goldman Sachs, anticipate that global oil consumption will exceed supply, reducing stockpiles and supporting prices.
Tight supply has also influenced oil prices, as the Organisation for Petroleum Exporting Countries (OPEC) maintains its supply caps. The EIA stated that the extension of voluntary OPEC+ production cuts would continue to reduce global oil inventories throughout the rest of the year and into 2025, sustaining upward pressure on oil prices.
This situation could lead to persistent inflation, preventing the Reserve Bank from cutting interest rates later this year.
There is some good news that could offset potential petrol price increases due to rising oil prices—a stronger rand. The rand is currently trading near R18.20/$, and Bishop forecasts it to average R18.00/$ this quarter, potentially seeing sustained strength towards September as the US leans towards cutting interest rates.
A stronger rand over 2025 should help counteract some increases in South Africa’s oil prices, though much will depend on the timing and speed of US interest rate cuts. As the rand strengthens, it becomes relatively cheaper for South Africa to import oil and other petroleum products, pushing prices down.
The positive atmosphere surrounding the formation of a Government of National Unity (GNU) has significantly strengthened the rand, even dipping below R18/$ for the first time in ten months. However, this strength has not been consistent. Following the election, the currency experienced significant fluctuations, exceeding R18.50/$ at some points.
The relative strength of the rand depends heavily on whether South Africa’s new government can deliver on its promise to enhance economic outcomes. Efficient Group Chief Economist Dawie Roodt outlined two likely outcomes for the rand.
If the GNU can perform and demonstrate true reform, the rand could easily appreciate and return to R17/USD in the short term. In the medium to long term, Roodt expects the currency to gradually depreciate by roughly 2% to 3% annually against the US dollar. Assuming the GNU “does all the right things,” South Africans could expect the rand to continue gradually depreciating against the US dollar at around 3%.
The second scenario is less favourable. If the GNU succumbs to political hurdles and collapses, with another political formation taking over in South Africa, the rand could plummet, potentially exceeding R20/USD or even reaching R22/USD. Such a decline would significantly increase the cost of importing oil into South Africa, leading to higher petrol prices.
