The rand has been an unlikely hero in South Africa’s fuel price calculations in recent times.
Sustained strength in the rand/US dollar exchange rate following the formation of the new Government of National Unity in June 2024 means that local motorists have enjoyed significant fuel price reductions over the last five months, more than what was brought by a fall in international oil prices.
Simultaneously, the appreciation of the local currency might protect motorists from the brunt of the increases expected for November now that oil rates are climbing once again.
The GNU Dawn
The two main determinants of fuel prices in South Africa are global oil prices and the rand/US dollar exchange rate.
Global oil prices are the biggest inputs into the Basic Fuel Price (BFP), which is the cost at which fuel is purchased and imported to the country.
The BFP is denominated in US dollars, hence, the more favourable the exchange rate between the two economies, the lower the cost to bring in a litre of propellant.
In June 2021, the rand/US dollar exchange rate sat at a two-year low of approximately R13.38/dollar, with Brent Crude Oil swapping hands at around $74.50/barrel at the same time.
This was more or less when South Africa started doing away with many of the Covid-19-related lockdown restrictions, with the monetary policies of the time that were meant to stimulate spending subsequently giving way to rapid inflation.
The value of the rand tumbled over the next three years as the country grappled with rising prices, record levels of load-shedding, social unrest, and port crises.
In June 2022, the exchange rate averaged R15.20/dollar, and in June 2023, it rose to an average of R17.77/dollar.
The price of Brent Crude oil also skyrocketed in these years, reaching $117/barrel in June 2022 before subsiding back down to $75/barrel by June 2023.
In light of these unfortunate developments, the country saw its highest fuel prices on record of R26.74/litre for petrol 95 in July 2022, when both the exchange rate and oil prices were severely bloated.
From June 2023 to April 2024, the rand/US dollar ratio hovered between R18 and R19/dollar, until optimism around the national elections started piquing investor interest and volatility in the exchange rate subsided as they awaited the outcome.
Following the official swearing-in of the seventh administration, now affectionately known as the Government of National Unity (GNU), in July 2024, coupled with load-shedding all but vanishing around the same time, the rand started gaining ground against the vaunted greenback.
From a high of R19.39/dollar in April 2024, the rand/US dollar exchange rate dropped to an average of R18.74/dollar in May, then R18.71/dollar in both June and July, R18.66/dollar in October, and R17.67/dollar in September, consequently helping to secure five consecutive and rather generous fuel price cuts over this time.
As a result of the continued gains, the recent rise in global oil prices will have less of an impact on local fuel users than it could have.
The global oil market was thrown into turmoil in recent months as tensions in the Middle East rapidly escalated.
In October, Israeli intelligence carried out deadly attacks on Hezbollah members hiding out in Lebanon, with Iran retaliating on 1 September by firing a flurry of missiles directly at Israel.
Iran is one of the world’s top oil-producing nations, adding approximately two million barrels per day to the global oil supply. It also controls parts of the narrow Strait of Hormuz through which 21 million barrels of oil travel per day.
The country’s retaliation against Israel thus sparked concerns that the region could become engulfed in conflict which would hamper the supply and movement of oil.
Prices for the black gold subsequently shot upwards of $80/barrel from the low-$70s they were trading at in prior weeks.
Owing to these oil price fluctuations, data from South Africa’s Central Energy Fund (CEF) indicates that local fuel prices could reverse some of the gains they made over the past five months.
As of 21 October 2024, the CEF expects that petrol prices will be adjusted as follows come the first Wednesday of November:
- Petrol 93 – Increase of 14c a litre
- Petrol 95 – Increase of 26c a litre
- Diesel 0.05% – Increase of 19c a litre
- Diesel 0.005% – Increase of 17c a litre
While these predictions aren’t exactly a sight for sore eyes, they could have been worse had it not been for the stellar performance of the rand.
The higher oil prices contributed to an under-recovery of 25-37c/litre for petrol and 29-30c/litre for diesel in October thus far.
Simultaneously, the increased purchasing power of the rand led to an over-recovery of around 11c/litre for petrol and slightly under 12c/litre for diesel.
As such, the rand’s strength will reduce the expected price hikes for November by 44% for petrol 93 and 31% for petrol 95, as well as by 38% for diesel 0.05% and 40% for diesel 0.005%, as things stand at the moment.
This is in stark contrast to pre-GNU, when the continued deterioration of South Africa’s currency exacerbated the adverse effects of rising global oil prices.
The good news doesn’t end there, as it seems the rand will continue to work in favour of local motorists for at least another few months.
UK-based foreign exchange company Ebury predicts that the rand will gain a further 5% against the US dollar to reach R16.75/dollar by early 2025, down from its current levels of R17.63/dollar.
This should stave off the worst of the anticipated oil price hikes over the coming weeks and months and provide motorists with some level of relief at the pumps.
Join the discussion