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Rand to be dominant in 2020 fuel pricing

Rand to be dominant in 2020 fuel pricing

With the international oil market stable, Rand weakness is likely to be the dominant factor in fuel pricing for the year. This is the opinion of the Automobile Association (AA) which today released its annual fuel price outlook

"Factors affecting the fuel price have rarely been more finely balanced than they currently are," says the AA.

The AA notes that much of the world's oil is produced in some of the most politically fluid territories, and South Africa's influence on the international oil price is negligible.

"We consume under one percent of the world's daily oil demand. Even a total boycott of petroleum fuels in South Africa would be unlikely to affect world prices, so the country has little scope for influence. However, the recent tensions between Iran and the USA rattled the markets into a price spike of several dollars a barrel, showing where the influence truly lies."

The Association says the unpredictability of the current US administration exposed South African fuel users to collateral damage from oil price movements, as seen during the Iran affair in early-January.

Staying on the home front, the AA says the key problem remains, as for the past several years, economic policy. The Association says tax revenue undershoots, infrastructure underspend, de-industrialisation and ongoing power blackouts have counteracted entreaties by President Cyril Ramaphosa for investment.

"Capital follows returns, and if South Africa is, as seems likely before long, downgraded to junk status, the Rand is likely to weaken further, offsetting returns investors might make. This increases the possibility of a downward spiral in which Rand weakness accelerates while risk-averse capital investment seeks other harbours,” notes the AA

It says it doubts a downgrade can be warded off, but notes that strong shifts in stance from government and clear articulation of investment-friendly policy are key to limiting the time the country spends outside the investment-grade brackets.

The AA says the combination of these factors was negative for the Rand, and likely to offset the general stability the Association expected to see in the oil price.

"Our overall view is that South Africans should expect increases in the fuel price in 2020, driven primarily by Rand weakness. We do not foresee declines in the oil price sufficient to offset our expectations for Rand depreciation, and we cannot rule out the possibility that South African fuel prices may test their previous record highs this year," the Association concludes.

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