BUSINESS NEWS - The year started with fuel price increases of more than 40c per litre for petrol and 55c for diesel, raising the question of what motorists can expect for the rest of 2021.
While forecasting the movement in oil prices and currencies – the two main drivers of fuel prices in most countries – is notoriously difficult, it seems that SA must prepare for further increases.
The Automobile Association (AA) has already indicated that it expects petrol to increase by 80c in February, while the wholesale price of diesel is expected to increase by 61c.
A credible outlook for the oil price usually comes from the US Energy information Administration, which expects the benchmark Brent crude oil price to average around $49 per barrel this year.
This forecast is only slightly higher than the average oil price during the last quarter of 2020.
But much higher oil prices are expected from another important source in America.
US Energy Secretary Dan Brouillette commented in a recent interview with CNBC that his department sees oil prices increasing to above $60 per barrel and even as high as $70 as economies worldwide start opening up as vaccines to treat Covid-19 are becoming available.
“It is time for governments to open up economies. The process must resume. They should do it quickly,” he said.
Oil producers would obviously like to see this scenario, and movements in the oil price during the last few months seemed to play to their tune.
The oil price has been in an upward trend since the last week of October 2020 when it turned below $37 per barrel.
The price exceeded $50 for most of December. Unfortunately for South Africans, the price has continued to climb in January and the rand has depreciated – signalling another increase in fuel prices in February.
Izak Odendaal, investment strategist at Old Mutual Wealth, says the biggest factor that will determine the oil price this year is to what extent demand will return to normal levels.
Permanent demand destruction?
Odendaal poses a simple question: “Do people start travelling again as they did before 2020?”
He says this seems unlikely until there is widespread vaccination – and even then, working habits might have changed permanently.
“If more people work at home, fewer people will be driving to the office. Similarly, the demand for business trips might be permanently lower.
“Finally, there is the longer-term issue of a shift towards electrical vehicles which also points to permanent demand destruction,” says Odendaal.
There has been some recovery in demand for oil from the harsh lockdowns of early 2020, but demand is nowhere near normal levels yet.
He warns that the recent Saudi Arabian output cuts have put upward pressure on the oil price, but “we need to ask why they are cutting supply”.
“They wouldn’t do it unless there was too much supply on the market relative to demand.
“On the supply side, the US shale industry has emerged as a power swing producer. As soon as the price starts rising, shale production picks up,” says Odendaal.
His good news is that it seems unlikely the oil price will move towards the $80-100 per barrel level seen in the past anytime soon.
“Of course in the short term, the oil price can be very volatile – it even turned negative in April 2020 – and there are any number of geopolitical incidents that can result in a spike,” he says.
He adds that if current trends persist, the oil price will almost double within a few months from the low levels seen during most of 2020.
More concerning with regards to the risk of higher fuel prices is the outlook for the exchange rate.
The rand looked fairly strong for most of 2020, mostly because we focus on the rand/dollar exchange rate in SA.
While the dollar was particularly weak, it seems to have started to recover with a detrimental effect on the rand. Last week, the rand traded at its worst levels against the dollar since the beginning of November 2020.
The rand strengthened from less than R17.80 per dollar in mid-2020 to less than R14 per dollar in December, but fell to R15.50 last week.
The rand remains difficult to predict, with most experts cautious about chancing a prediction without first rolling out several arguments.
Sanisha Packirisamy, an economist at Momentum Investments, expects “moderate rand weakness” from current levels given SA’s poor macroeconomic fundamentals.