FUEL prices have nudged higher so far this year and unfortunately, motorists had to brace for another fuel price increase for March. According to the announcement published on 1 March 2024 by the Central Energy Fund (CEF), a state-owned energy company reporting to the Department of Mineral Resources and Energy, the price of diesel was set to increase by R1.06/litre, while both 93 and 95 octane petroleum were expected to increase by R1.21/litre. Jalpa Bhoolia, FNB investment analyst and Koketso Mano, FNB senior economist take a closer look at factors affecting the fuel price in South Africa and the outlook beyond March.
The fuel price increases have been brought about by a persistently higher Brent crude price, coupled with a weaker rand. For most of February, the price of Brent crude was trading above $80/barrel. Geopolitical risks stemming from the protracted conflict in the Middle East, winter-related supply tightness in North America, as well as additional policy relief measures from China, were among the key drivers of the oil price. Over and above this, the local currency traded weaker throughout the month, as investors on the local front digested the 2024/2025 Budget Speech, while a higher-for-longer interest rate stance by the US Federal Reserve beefed up the US dollar.
Fuel price under-recovery for February
While the fuel price outlook at the beginning of February was for a less steep price hike, multiple global factors at play have since propped up the oil price, leading to an under-recovery of the basic fuel price for this month.
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 into 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 balance in the oil market will be upheld by continued OPEC+ output restraint, growing non-OPEC supply (particularly from the Americas), and constrained demand as global growth reaches a trough. Near-term support should emanate from the upcoming driving season in the Northern Hemisphere as well as higher refinery margins. Furthermore, the risk of further escalated tensions in the Middle East would result in even higher oil prices and logistical costs, keeping goods inflation elevated. This is while the rand continues to experience near-term pressure from hawkish rhetoric by advanced market central banks such as the Federal Reserve. All of this combined, results in higher fuel prices.
It goes without saying that consumers in South Africa are already stretched, so the impact of higher fuel prices hurts even more – as motor vehicle running costs and public transport costs will be a notch higher. Additionally, higher transport costs will roughly translate to higher product costs at stores – another negative for consumer inflation and purchasing power. Fortunately, the rand is currently estimated to be severely undervalued, and post-election valuation gains should support lower inflation, lower interest rates, and higher real disposable income. Therefore, the first half of the year will remain challenging, but we look forward to some reprieve in the second half.
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 30% 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. It is important to note that the abovementioned levies have not been raised in the 2024 Budget, however, the carbon fuel levy will lift to 11c/litre for petrol and 14c/litre for diesel effectively from the start of April 2024.
- 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, customs and excise duties and retail margins for fuel station owners and make up roughly 17% of the total fuel price over the past three months.
