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FNB expects the fuel price trend to worsen in 2023

03 May 2023 Jalpa Bhoolia, Investment Analyst at FNB Wealth and Investments, and Koketso Mano, FNB Senior Economist

While motorists cheered a fuel price decrease in April, the outlook is more complicated for May.

According to data released on 26 April 2023 by the Central Energy Fund (CEF), the price of diesel is set to decrease by 73.5c/litre, while both 93 and 95 octane petroleum are expected to increase by 37c/litre. This means that the average logistics vehicle with an 80-litre diesel tank will cost R58.80 less to fill up, and 93 and 95 octane petrol tanks will cost an additional R29.60.

As the Chinese economy reopens and trade began to normalise, oil demand from the world’s largest crude oil importer pushed brent crude prices higher at the start of the year. Through March, however, oil prices came under pressure as a mini banking-crisis spurred fears over a deterioration in macro-economic conditions, while an unexpected OPEC+ supply cut was the main catalyst behind a substantial increase in oil prices at the beginning of April. The grouping cited market instability, persistently weak demand, and growing recessionary fears as the reason for the reduction in planned production.

The divergence between the price of petrol and diesel over the past few months remains of interest. Diesel demand has been hard hit by tepid global economic activity. The divergence we are seeing this month was driven by an under-recovery in the petrol price and an over-recovery in the diesel price by the CEF.

What does an over-recovery and an under-recovery mean?
Certain petroleum products are subject to price control by regulatory authorities. Selling prices are adjusted monthly to account for various economic factors affecting the fuel price.

An over-recovery usually happens when consumers are paying more than they should for the product on that day, while an under-recovery means the opposite. The daily over- or under-recovery values are accumulated over the month and the final excess or shortage amount is then incorporated in the pump price on the first Wednesday of the next month. The CEF releases a daily report on the over-recovery and under-recovery of the basic fuel price.

Outlook:
The International Monetary Fund (IMF) has marginally downgraded its growth projection for the global economy from 2.9% in January to 2.8% in the April World Economic Outlook. Nevertheless, global growth slowed from 3.4% in 2022, with the weakness being driven by advanced economies. Furthermore, tighter lending standards following the bank sentiment fallout, could further weigh on growth. In response to the risk of weaker economic activity and lower oil demand, oil producer group and its allies, OPEC+, has shown willingness to support prices through production cuts. However, production cuts have so far managed to only support prices and have not driven the kind of rally that would test 2022 highs.

The US Fed is expected to hike by another 25bps in May and the European Central Bank (ECB) could go even further to rein in wage growth. Rising real rates in these advanced economies, while SA’s current account falls into deficit territory and local structural constraints mount, should continue to weigh on the rand and worsen local price pressures.

We project the trend in petrol prices to worsen over the remainder of the year, even though prices should remain below post-lockdown highs and the volatility in international markets should keep the outlook fluid.

How fuel prices are calculated:
• Basic Fuel Price: The basic fuel price makes up roughly 53% of the total price of fuel over the past three months. The Basic Fuel Price is made up of the purchase price of fuel (in US dollars) as well as freight costs, insurance, storage, and financing. In South Africa, the fuel price is adjusted on the first Wednesday of every month and is determined by two main factors: the rand/US dollar exchange rate (how fuel is purchased), and international petroleum prices (how much the fuel costs to purchase).
• Taxes and levies make up 31% of the total price of fuel over the past three months, with the General Fuel Levy (GFL) and Road Accident Fund (RAF) Levy accounting for the largest portion. The GFL goes to National Treasury and government is free to utilise this levy in any manner it deems fit. The RAF levy can only be utilised for road accident claims.
• Wholesale and retail margins, as well as distribution and transport costs, are the final contributors to the gross petrol price. These are costs associated with transport and storage, custom and excise duties and retail margins for fuel station owners and makes up roughly 15% of the total fuel price over the past three months.

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