Petrol price to rise – blame the weak rand and summer in Europe

The petrol price is set to rise by as much as 44 cents a litre on Wednesday – and the factors that have conspiring against motorists’ wallets include the weak rand, the start of the driving season in Europe and even Ramadan. The warmer weather in the north has, however, eased pressure on diesel prices, a boon for the cost of emergency power generation for cash-strapped Eskom.

The price of petroleum products will increase from July 1 – mainly because the rand is weakening against the dollar, the department of energy said. For the period under the department’s review – the 30 days that ended on June 26 – the rand lost 40 cents against the dollar.

The price of Brent crude oil remains at six year-lows of about $65 a barrel. But the rand, which was at R11.80 to the dollar on May 1, jumped to R12.20 on June 1 and reached as high as R12.60 during the course of the month. (It was hovering around R12.30 on Monday morning.)

To recover this cost, the energy department will raise the price of 93-octane unleaded petrol by 44 cents a litre, and the price of 95-octane unleaded fuel by 41 cents. Wholesale illuminating paraffin will jump by six cents a litre and both grades of diesel will rise by four cents a litre. Liquefied petroleum gas will see the biggest increase, at 56 cents a litre.

This means that, as of July 1, a passenger vehicle with a fuel capacity of 50 litres will cost the motorist an extra R22 each time they fill up with 93-octane fuel.

The weakening of the currency, the energy department said, was as a result of negative sentiment on emerging markets globally.

Positive outlook in the US
The negative sentiment on emerging markets is partly a result of growing positive sentiment in developed markets, especially in the United States, where economic recovery continues and which has witnessed positive economic data over recent weeks.

Markets reacted positively in the beginning of June to news that the US trade deficit shrunk by 19.2% in April and that 280 000 jobs were added to the economy in May.

Optimism grew further as US Federal Reserve chairperson Janet Yellen signalled in mid-June that the Fed would continue to move toward an interest rate hike later this year and that it will be appropriate to raise rates this year if events unfold as anticipated.

Internationally, demand for fuel has also been pushed by the driving season in Europe, where consumer demand for petrol rises in the summer months, as well as pre-Ramadan buying in the Asian market, the energy department said.

Shoring up of stocks in Asia prior to Ramadan has also pushed up the price of palm oil, and even sugar, among other products.

In May, the Daily Telegraph reported that Britons on holiday in the eurozone will enjoy the lowest fuel prices since 2007 this summer (25% cheaper) because of the low crude oil price and the pound’s strength against a weak euro.

But the higher demand for fuel has had an impact on supply and played a small part in pushing up the price for countries that don’t benefit from a strong currency.

Respite for diesel
Despite the weakening rand, the law of supply and demand is still a powerful determinant of product price, and this factor has influenced the comparatively slight hike in the diesel price.

Chris Bredenhann, PwC Africa’s oil and gas advisory leader, said each petroleum product is subject to its own supply and demand factors.

The comparatively lower increase for diesel is some good news for South Africa’s troubled power utility, Eskom, which has been racking up unplanned costs by using the fuel to run open-cycle gas turbines flat out in order to avoid load shedding.

These costs are a vital component of the utility’s request to the energy regulator to hike electricity tariffs by 9.5%.

Eskom estimates the cost of the diesel to be R1.5-billion a month. The larger of the two gas turbines, Ankerlig, consumes 425 000 litres of diesel every hour and the other, Gourikwa, uses 236 000 litres an hour.

Bredenhann said the lower increase for diesel could be associated with the warmer weather in developed economies.

“Diesel is also used internationally in power generation, so … their summer will see less demand [for it] globally.”

On Monday afternoon, the South African energy regulator denied Eskom’s application for an electricity tariff hike.

Opec maintains supply
The Brent crude price still remains low as a result of unchanged supply from the Organisation of Petroleum Exporting Countries (Opec).

Historically, when supply grew and drove oil prices down, Opec nations often resolved to cut supply to drive prices back up.

“The traditional approach would have been to cut production,” said Bredenhann. “But that isn’t working, because the US is producing more and more.”

US gas and oil production has grown significantly through the use of technology enabling the widespread fracking of shale gas deposits.

“Opec has sort of taken this view that they are not going to try influence the price this time. They realise they are at risk of losing some market share by cutting down production to shore up the price. That’s because there is sufficient other supply,” Bredenhann said.

The low oil price has however served to somewhat reduce drilling activity in the US, but has also improved efficiency, Bredenhann explained.

“It has forced industry to carefully look at cost and how they use technology in order to be more efficient. In the US they are in fact producing more oil. They are doing more with less,” he said.

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