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After a not-insignificant increase in petrol and diesel prices in August, the under and over-recovery balances show a shocking start for the month ahead.
The daily snapshot of balances from the Central Energy Fund (CEF) shows that the month of August is starting off squarely on the back foot for fuel prices.
The group is showing a massive under-recovery ranging between R1.23 and R1.26 per litre for petrol and an even bigger under-recovery of R2.34 per litre for diesel.
While the month has just started, and things can change significantly over the coming weeks, market conditions would have to swing wildly for both the rand and oil prices for these under-recoveries to reverse into a positive for drivers.
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 in 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.
According to the CEF’s data, the main culprit for alarming under-recovery is the movement in international product prices, which is mostly impacted by the oil price.
This component of the recovery balance accounts for between 145 cents per litre to 258 cents per litre.
The rand/dollar exchange rate – which is the other key component in the recovery balance – is currently still benefiting local pricing, even though it is trading weaker than at the end of July.
The exchange rate is currently contributing to an over-recovery of 22 to 24 cents per litre – but this is nowhere near enough to counter the international product prices.
Global oil prices have climbed significantly over the past month, having moved up from around $75 a barrel at the start of July to $85 a barrel by the time of the latest petrol price adjustment.
Because of the rising prices throughout July, local motorists were punished at the pumps this week with a 37 cents per litre hike in petrol prices and a 72 cents per litre hike in diesel.
However, this increase has not been enough to make up the balance in local vs global fuel prices – hence the staggering under-recovery at the start of the month.
For this trend to reverse, South Africans will have to hope for oil prices to come down.
Don’t panic…yet
More positively, a move by ratings agency Fitch to downgrade the United States’ credit rating to AAA (the second-highest rating, but down from AA+) saw a resultant dent in oil prices.
According to XS Market Analyst, Samer Hasn, the downgrade saw a sharp decline in crude oil features which pushed US West Texas Intermediate oil drop below $80 a barrel and brent crude fall to $83 a barrel.
The drop was a result of the downgrade – weakening sentiment about the US economy and demand for oil – as well as other market news, such as oil inventories, which are likely to come under pressure in the month ahead.
“Inventories of crude oil fell by more than 17 million barrels, to 439.8 million barrels, during the week ended July 28. The withdrawals were very far from the consensus estimates of analysts at 1.367 million barrels,” Hasn said.
“While these sudden withdrawals from inventories come as a pre-emptive reaction of the markets to the expected supply constraints, the markets are awaiting the decision to extend oil production cuts by the Organization of Petroleum Exporting Countries (OPEC) on Friday, led by the Kingdom of Saudi Arabia, which is likely to extend the voluntary cut in oil production by one million barrels per day during the month of September,” he said.
What this means is that there are both upside and downside risks to the oil price in the coming weeks, Hasn noted.
On the one hand, the next test for oil prices is around the $81 dollar per barrel mark. A breach below this has previously pointed to the possibility of a continuation of the bearish trend in oil prices, with the possibility of a decline towards $77, followed by $72 next.
However, on the other hand, restoring an upward trend may invalidate the previous bearish hypothesis to make the levels of $86 a barrel next in line.
A breach above this would point to the next levels of $89 a barrel, he said.
Locally, that means that there is still a lot of room for these changes to reflect in local fuel pricing, and with a full month ahead, it’s still too early to tell. However, the fact remains that drivers are starting this journey on the back foot, with a rough road ahead.
Read: How much it costs to drive South Africa’s most popular cars at the current petrol price
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