Can we expect a fuel price cut next month?

FIFI PETERS: Some good news. Next month we could be in for a bit less pain – still pain, but less pain – in filling up at the pumps owing to the expected decline in petrol as well as diesel prices.

To discuss why, and what is driving prices lower at this stage and how low prices can go, we are joined by Koketso Malo, an economist at FNB. Koketso, thanks so much for your time. You’re coming with good news, potentially, allegedly, supposedly, but talk to us about what is happening with the fuel and diesel prices and how much relief we could be set for.

KOKETSO MANO: Thank you so much, Fifi, for having me and hello to all of your listeners. So yes, when we look at the data that we get from the Central Energy Fund, it seems as though we are set for a cut next week. The over-recovery at the moment in the petrol price is over R1.80. And we still have to account for that 75 cents fuel levy relief that will lapse. So we have to discount that from the numbers.

But it’s still looking like an over R1.10 cut coming through for South Africans next week.

FIFI PETERS: Why?

KOKETSO MANO: We have fortunately seen international developments moving in our favour. Brent crude oil prices have moved lower in the month of July versus, for example, the month of June. So we have seen Brent crude oil prices trading in the range of $100 to $110 per barrel versus $110 to $120 per barrel in the month prior. That has broadly been supported by this over-recovery that we have been seeing from the Central Energy Fund data.

So maybe for just some of the reasoning of why we’ve seen Brent crude oil prices trending lower, I think most of that reason is the global-recession fears that have really been coming through. And obviously with lower global growth there’s lower demand for oil. That has been the overriding factor bringing oil prices down, but we still remain cognisant that oil prices remain supported by supply constraints.

We have seen a little bit of support today also coming through from this general energy-constrained climate that has resulted in oil prices being much higher than we would have seen pre lockdown.

FIFI PETERS: It’s almost like two forces at play at the same time in this oil market, because on the one hand you’ve got concerns around the slowdown of the global economy and recession and stagflation – all of that jazz – pulling the prices lower and on the other hand you’ve got concerns around supply dynamics and whether there is enough capacity to meet all the demand pushing prices high. I suppose this time around the recession force, as it were, is pulling strong and this is why we have prices coming down.

But I’d like to understand your own forecasts of where you see this, and how you see this ending at the end of the day, because we hit the peak – or was it the peak, the $130 a barrel? – in the middle of that Ukraine war when things were pretty hectic. Or could we reach those levels again, because I suppose that determines your view on where you see oil headed from here?

KOKETSO MANO: Based on our forecast from the FNB side, Fifi, we don’t see oil prices going back to those levels. But it is important to consider that there’s a lot of uncertainty in the market at the moment. We still have geopolitical tensions between Russia and the Ukraine ongoing and, until that is resolved, there’s really no way that you can say with certainty that oil prices will not find that support again.

And especially if you think about what’s really been driving these global-recession fears, it’s mostly tightening monetary policy or tightening global financial conditions. So we’ve been seeing the EU hiking [rates], we saw the Fed hiking quite aggressively in the June meeting. They are expected to hike once again aggressively tomorrow. All of these factors have really just brought on [these] fears of a potential global recession coming through.

But if monetary policy, for example, were to tilt more towards supporting growth, that could also be something that tends to support oil prices, because that would mean that the demand would not be ……4:48 as much as we are currently expecting. That is not our baseline view, I must say, Fifi. We still see monetary policy tightening. We still see that that debt ……4:59 growth somewhat. We expected those geopolitical tensions to ease in the middle of this year, but it doesn’t seem like that is going to happen.

So those risks still continue to present themselves in our forecast. But, as I said, we see oil prices trading lower, but not as low as we have seen pre-pandemic, simply because these supply constraints are really coming through in the market. Under investment for a couple of years, where we are trying to move towards cleaner energy, has really resulted in the supply constraint and it is going to keep oil prices elevated going into the future.

FIFI PETERS: Koketso, thanks so much for giving us that balanced view. Koketso Mano is an economist at FNB. I think the bottom line is things are still pretty hectic, but at least next month we could be in for a bit of a break.

But get this. In January, 2021, the price of fuel was R14.86/litre. Fast forward to 2022 and we’re looking at R26.74/litre. That just shows you the magnitude of the decline. Pretty steep.