OIL PRICES REBOUND ON INTERNATIONAL
MARKETS.
On Tuesday at midnight petrol prices are set to decline by 13 cents per litre (ie by
3.6%). This follows a 10 cents per litre (ie 2.7%) decline at the beginning of the year,
giving a cumulative decline in fuel prices so far this year of 6.2%. A couple of months
ago some economists were forecasting that the petrol price would decline to below three
Rand per litre on the back of lower international oil prices which were anticipated at the
time. However, two important developments have taken place since then which appear to have
put paid to such hopes, to the extent that this week's cut in the petrol price might prove
to be the last. Firstly, the Rand began to slide heavily against the Dollar a month ago,
neutralising much of the benefit of the decline in the international oil price. Secondly,
OPEC agreed to reduce its output quotas by 6%, thereby depriving the oil market of supply
as a means of supporting the price of crude. More recently, over the past week, oil prices
have rebounded from around 25 dollars per barrel to 29 dollars per barrel on the back of
signs that US oil inventories have fallen to low levels once more. Therefore, even though
there is still an under recovery at current petrol prices of around five cents per litre,
this under recovery is likely to be wiped out in coming weeks.
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HIKE IN FUEL LEVY TO NEUTRALISE ANY POSSIBLE REDUCTION IN FUEL PRICES.
An additional factor likely to put a dampener on
chances of further declines in the petrol price is the near certainty that the fuel levy
will be increased in the budget in a fortnight's time. The government is likely to be only
too happy to use the opportunity which might still exist of an under recovery on the
prevailing petrol price to increase the fuel levy without this being translated into a
commensurate hike in the petrol price. Were the government to increase the fuel levy in
line with the current rate of inflation of 7%, the fuel levy would need to rise by 7 cents
per litre. At current rates of under recovery this would wipe out the entire under
recovery. The increase in the fuel levy is only set to be introduced at the beginning of
April. Therefore, it is possible that there might be a tiny further reduction in the price
of petrol at the beginning of March prior to the higher fuel levy being introduced, but
even this is unlikely given the recent rebound in the international oil price. In
conclusion, unless one were to witness a remarkable rally in the Rand/Dollar exchange
rate, it seems unlikely that petrol prices will fall below the level which will prevail
later this week.AT BEST, THE
PETROL FACTOR WILL PUSH INFLATION DOWN BY 1%.
Much optimism has been expressed by many commentators
regarding the probability of a steep decline in inflation over the course of this year on
the back of lower fuel prices. However, one needs to temper such optimism. Were the price
of petrol to remain at February's level for the remainder of the year, the 28 percent
year-on-year growth in fuel prices will gradually be transformed into nil growth in fuel
prices. Given the 4.2% weighting of fuel within the overall CPI, this on its own would
result in a reduction in inflation of just over 1%. Although significant, this is nowhere
near as great as the reduction in inflation anticipated overall over the course of the
year. Since many interest rate projections are based on inflation forecasts that may be
too optimistic for the reasons mentioned, it is accordingly dangerous to forecast a
significant decline in interest rates over the coming year. |
