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Predicted fuel price drop will bring welcome relief

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Predicted fuel price drop will bring welcome relief

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Predicted fuel price drop will bring welcome relief

21-07-2016

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A decline in oil prices and, indeed, Rand strength are the reasons for the expected fall in the price of petrol in August.  Arthur Kamp, Investment Economist at Sanlam Investments, give us a sneak preview as what’s to come and why.

Post the UK referendum in which UK voters voted to leave the Euro area, risk assets, including emerging market currencies, have benefitted. Rand appreciation has been especially pronounced against the pound sterling, which has weakened sharply against the US dollar. The weakness of the pound reflects expectations that the adverse impact of Brexit is likely to be greatest for the UK, which runs a large current account deficit.

But, the rand has also appreciated against the US dollar and the euro. One reason for this is the expected further easing of monetary policy, notably in the UK, but also Japan and possibly by the ECB. At the same time, expectations of the pace and timing of US interest rates eased. With interest rates in developed economies expected to remain lower for longer (as central banks seek to limit any possible damage to economic activity following the UK vote) the rand and other emerging market currencies have strengthened as investors appeared to hunt for higher yields.

One should be wary of extrapolating the current strength of the rand in the near term. Risks remain. Of these two stand out.

  • First, the US Federal Reserve may resume its interest rate hiking cycle late this year or early next year.
  • Second, there is still the possibility of a downgrade on South Africa’s foreign currency denominated sovereign debt, which may cause significant volatility in the rand.

From a longer-term perspective, we could argue that the rand is undervalued, implying it has the potential to appreciate further against the US dollar if we contain inflation and  implement  the required economic reforms to lift economic growth. The latter would support government revenue collection and the National Treasury’s aim of stabilising South Africa’s debt level.

With regard to the petrol price drop, it may not only be helpful to consumers in terms of the lower cost of filling the tanks of their vehicles, but should also, if sustained, help ease cost pressures in the transport of goods generally. This may not, however, filter through into lower inflation for goods other than petrol, since business profit margins have been under pressure. Although the over-recovery on unleaded petrol  was 95 cents per litre on 18 July 2016 (and an average of 84.5 cents per litre for the period 6 July 2016 to 18 July 2016) , it is significant and points to the possibility of a large petrol price drop in August 2016. However, further declines are not guaranteed. Indeed, given the typical volatility seen in the rand and oil prices, a petrol price decline in August may well be followed by increases later. We just don’t know. Hence, transport businesses may simply opt to restore some margin.

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