/ 4 December 2014

Oil bonanza is not only good news

The oil price took a huge dive this week to reach five-year lows of less than $65 a barrel following an Opec meeting in Vienna.
The oil price took a huge dive this week to reach five-year lows of less than $65 a barrel following an Opec meeting in Vienna.

South Africa’s benefit from the dramatic fall in oil prices could be reduced by a simultaneous drop in the prices of other commodities such as gold, platinum and maize.

The oil price took a huge dive this week, with West Texas Intermediate (the industry benchmark) reaching five-year lows, to less than $65 a barrel. The dip followed a meeting held by Opec at which it decided to leave it to the market to reduce a global glut rather than putting limits on the production levels of its members.

Many see the move as an invitation to engage in price warfare with the fracking lords in the shale-rich United States. Their extraction costs are high, with an estimated break-even point of about $69 a barrel at sites such as North Dakota’s Bakken field.

The drop in oil price is a reprieve for the South African consumer, with a 69c a litre decrease in the petrol price this week.

“It definitely does add extra bucks into the consumer’s pockets,” Nedbank’s chief economist, Dennis Dykes, said. “By the time we get to January, it will have shaved off 0.8% from inflation.”

This would decrease the pressure on the Reserve Bank to raise interest rates in the short term, he said.

However, the advantages might be nullified.

Other commodities produced by the country, including gold, maize and platinum, have traded at low levels in the past few weeks.

Platinum began the year at about $1 400 an ounce, fluctuated for the first half of the year and has ticked down steadily since July, moving from a high of more than $1 500 an ounce to $1 178 last month.

Thanks to greatly improved weather overseas, farmers reaped a record crop last year and maize prices tumbled 40%. The price rallied somewhat between September and December owing to a collective decision by farmers not to sell while the prices were so low. But that seven-week run ended this week – maize futures for December delivery fell 2.1%.

Gold, after starting the year at a lower-than-previous $1?225 an ounce, peaked at about $1 330 in July before slumping to $1 142 in November.

Dykes said lower commodity prices all round were “the unfortunate flip side” to the lower oil price. “Most of other commodities collapsed before the fall in the oil price. In a sense, the oil price is catching up in a spectacular way to what the others did earlier in the year.”

Since January, oil has lost about 36%, platinum is down 9.5% and the gold price has stayed within a percentage or two of its starting point.

Over the past two years, the losses have been more pronounced. Since the beginning of 2013, the gold price has plummeted 27.5%, the platinum price is down 19.5% and oil has plunged an almighty 35.8%.

According to Ole Hansen, the head of commodity strategy at Saxo Bank, the winners in the current commodity environment were “likely to be the biggest consumers such as the US, China and India,” he wrote in a note to investors.

“The losers can be found among producers such as Russia and Venezuela, where a lack of investment and diversification leaves these countries exposed to the sharp reduction in government revenues.”

So where does that leave South Africa, with energy accounting for 25% of its imports, but with an export portfolio of more than 50% commodities?

“The rand must not go much over 11 to the US dollar in order for the positive effect from the oil price to remain,” Dykes said. “Over the next few months, the question is: Will the rand remain stable?”

Dykes highlighted the extent of the volatility of sentiment surrounding the oil price, which has led Iraqi ministers to agree to a 50% pay cut to allow the oil-producing country to cope with a financial crisis brought about by the tumbling prices.

“I think the dynamics have moved against oil, but if I tell you what the futures were saying about oil two years ago it wouldn’t have been the current scenario,” he said. “The psychology has changed quite drastically.”