What fuel price surges mean for consumers

Fuel prices will increase by over R3 on the 1 April. Following the most recent war in the Middle East, both the oil price spike and a weaker rand sustained the under-recovery that has led to these significant price increases. The increases would have been worse had it not been for government intervention through the fuel levy. By temporarily reducing the fuel levy burden by R3, this cushioned the final increase in the inland 95 unleaded petrol price to R23,36 per litre and wholesale diesel prices to over R25 per litre on average. With this relief, taxes account for under 20% of the price at the pump, as opposed to over 30% typically.

The reasons behind it all

The military conflict in the Middle East has entered its second month and new fronts of the war continue to emerge. While we were initially worried about the risk premium keeping prices temporarily elevated, the spread of the war, as well as oil infrastructure and logistics becoming collateral damage, has a more enduring impact. A longer-term disruption to energy supply will shift the demand-supply fundamentals that has favoured softer prices. Ultimately, continued geopolitical fragmentation and related confidence shocks should uphold volatility in markets.

Emerging assets impacted more

This is typically to the detriment of emerging market assets. For the rand, not only will higher oil prices weigh on terms of trade gains, but the market’s reaction has also been less favourable for precious metals. Fortunately, SA’s fundamentals and ongoing reform agenda have reduced the risk of investing in the country, and this appears to have softened the impact on the rand. We still worry that further bouts of risk aversion and less supportive financial conditions could weigh on the rand and SA’s economic growth.

Fuel inflation on the rise

As things stand, we anticipate a strong uptick in fuel inflation in April, of nearly 20% m/m and over 10% y/y. Headline inflation could peak around 4%, with an annual average above 3.5% – staying aligned with the South African Reserve Bank’s tolerance band. However, an escalatory rhetoric around the war creates cause for caution and we will likely need at least another month of tax relief, as was the case in 2022, but this relief is costly, and government may have to reduce the exact figure should the war rage on. In a nutshell, higher inflation begets higher interest rates and rate cuts will continue to be pushed out as long as the inflationary impact is concentrated, but hikes will be on the cards as soon as evidence of material second-round effects abounds.