What to expect from petrol prices in South Africa over the next 6 months

Fuel prices in South Africa are looking to come down ever so slightly in June, but from there on out, the outlook becomes slightly bleaker.

Numbers at the pumps have been on a steady climb for the majority of 2023, peaking past R23/litre for the first time in May off the back of high international petroleum product prices.

Going into June, the depreciating rand/US dollar exchange rate will have a negative impression on the official adjustments, however, weaker energy prices are expected to offset these effects, said Rand Merchant Bank (RMB) client strategist John Cairns.

From July onwards, RMB expects to see “something of a rand recovery” with a belief that the rand/dollar trading rate will end the year at R18.15 to the dollar.

On the downside, Cairns said RMB anticipates oil prices will start rising once more following the most recent drop in response to strong demand from China as it ends its Covid-zero policies, weakness in the dollar, and tight supply following a mutual agreement among the oil-producing nations (OPEC) to cut production.

“The net result is expected to be small fuel price hikes in [the second half of 2023],” said Cairns, which will weigh on households’ spending ability and add to higher inflation via transport costs.

These projections can change at a moment’s notice due to several factors, notes the South African Petroleum Industry Association (Sapia).

Unforeseen events such as OPEC ramping up output again, the US federal reserve releasing oil stocks, or the outbreak of peace in Ukraine and subsequent lifting of Russian sanctions, a major oil producer itself, could see local fuel prices react in unpredictable ways, said Sapia.

Fortunately, analysts from FNB Wealth and Investments said that while prices are most probably going to continue going skyward, they are unlikely to reach the all-time highs of over R26/litre we saw in 2022 partly due to a slowdown in global economic activity and a subsequent drop in demand for oil.

Why oil prices and exchange rates matter

South Africa’s petrol and diesel prices are built on the basic fuel price (BFP), general fuel levy (GFL), road accident fund levy, wholesale and retail margins, and transport and distribution costs.

“For the May 2023 price change, the BFP comprised about 55% of the total build-up of the petrol price in Gauteng – that is more than half of our fuel price determination is dollar-denominated and thus subject to fluctuations in the rand/dollar exchange rate,” said Sapia.

Therefore, if the average exchange rate during one period is higher than in the previous, it will see the BFP rise as more rands are now needed to buy the same volume of fuel in dollars as before, and vice versa.

In turn, this either adds to or subtracts from the fuel price adjustments that will be made in the following month.

Fluctuations in oil rates also have a knock-on effect on local fuel prices as an uptrend in pricing results in a higher BFP for all nations. A higher BFP again means imported propellants are more expensive than they were the month before, leading to a rise in prices at filling stations.

The cost of the black gold moves in accordance with global supply/demand patterns, seasonality, and, of course, inter-country politics and as such can move up or down at any time.