R40 per litre still unlikely, but not completely out of the question just yet

The petrol price will remain high but will not get to R40 per litre, following the spike in international crude oil prices, unless the oil price reaches $150 per barrel and the rand loses a lot of its value very suddenly.

The spike in oil prices due to the war in Ukraine and the oil sanctions against Russia opened the gate wide for sensationalist claims that the local petrol price could reach R30 or even R40 per litre, but according to economic research group Oxford Economics Africa oil prices would have to jump to a record level of $150 per barrel and stay there for a while or the rand would have to suddenly depreciate steeply and suddenly for this to happen.

People are scared of the war in Ukraine and how it could affect the economies of the world and therefore experts are considering all the numerous transmission channels.

According to the group, the general consensus is that a slowdown in global growth is possible due to higher inflation as a result of supply disruptions as Russia and Ukraine are prominent exporters of several key commodities.

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Brent crude at $140 per barrel

Earlier this month, Brent crude oil prices surged to a multi-year peak of almost $140 per barrel, stoking fears of war-induced supply disruptions in a market that was already in trouble.

With Russia responsible for about 11% of global oil production in 2021, prices became extremely volatile as the price briefly dropped below $100 per barrel, before jumping again to trading at around $107.

According to Oxford Economics Africa, it has revised its forecast for crude oil prices to average about $100 per barrel in 2022 after crude oil averaged $70.8pb in 2021.

“Oil prices are expected to remain above the $100pb-level in the second and third quarters before gradually moderating towards the end of the year.”

The group also expects that Opec will increase production if Russian output does face disruption, but the response from North American producers will probably be more muted due to constrained production trends in recent years.

“Iran and Venezuela, which are both currently subject to sanctions, remain wildcards, but if bans in these countries were lifted, it would help ease supply-side pressures. Crude oil is expected to average $83.3pb in 2023, but the situation in Ukraine remains highly uncertain. A more prolonged conflict and sustained disruption to Russian supply could keep prices elevated for longer.”

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Higher inflation will follow

However, the impact of elevated oil prices will translate into higher inflation over the near term in South Africa.

It is necessary to talk about the fuel price and watch the price of Brent crude because households will increasingly start to feel the pressure of higher living costs building across the board.

Oxford Economics forecast inflation will average 5.6% this year compared to 4.5% in 2021.

In addition, the South African Reserve Bank (Sarb) is likely to raise the repo rate by 25 basis points on Thursday, with another 75 basis points to follow during the rest of the year.

The group expects further fiscal support will be limited as the general fuel levy and the Road Accident Fund levy were not increased this year, while proposals for revising the methodology for the basic fuel price are welcomed but will likely have a negligible effect on overall fuel prices.

The country can prepare for a hefty fuel price hike in April, with initial estimates pointing to approximate price increases of R2 for petrol and R3 for diesel.

The group says the price of inland 95-octane petrol is the most widely used benchmark and currently costs R21.60. However, uncertainty about the impact of the war has sparked conversation about how high South Africa’s fuel prices could actually go.

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How high can fuel prices go?

“About 50% of the petrol price is determined by the rand/dollar exchange rate and international oil prices, while taxes and levies represent roughly 30%. Government officials are currently discussing ways to limit fuel price increases through tax reductions.”

Oxford Economics also says in the unlikely event of the crude oil price jumping to $150 per barrel in April and the local currency crashes to R17.50/$, the petrol price could theoretically go up to R30/litre in May.

“To reach R40, the crude oil price would have to be at $200 and the exchange rate will have to deteriorate dramatically to R20/$, which is a highly unlikely scenario. However, based on our rand forecast and the outlook for Brent crude, it is plausible that domestic fuel prices will peak in the second quarter and decline gradually over the following quarters.”

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Here is the good news

The good news is that the rand remained resilient over the past few months, thanks in part to favourable terms of trade, while the latest change in the overall outlook for mineral prices will continue to benefit South Africa.

However, the group expects the petrol price to stay above the R20-level in the near term.

“In a highly uncertain and rapidly evolving situation, there is a high degree of risk attached to the forecast, as increased volatility could see significant price movements in any which way.”