The Department of Energy announced that the petrol price (95 ULP) will decline by a further R1.74/l, with effect from Wednesday, 6 May 2020. The latest announcement means that the price of 95 Octane (LRP, Gauteng) will now cost R12.22 per litre, which is the lowest price for petrol in South Africa since September 2016. In addition, the price of diesel will fall by around R1.56/l, the cost of Paraffin will drop by R2.97/l (retail price), and the gas price will decline by R2.62/kg.
The latest decrease in the petrol price, once again, reflects the sharply lower international product price (largely as a result of the slump in the international oil price) over the past month. This occurred partly as a result of a dramatic fall-off in oil demand, but also a lack of storage capacity to accommodate the still fairly high level of global oil production. Over the past five months the petrol will have declined by R4.08/l (-25%), which is equivalent (in terms of stimulus) to around a 75bps cut in the Repo rate. Over the past year, the petrol price will have declined by almost 27%.
A breakdown of the R1.74/l reduction in the petrol price reveals that, on its own, the decline in the international product price (oil price) would have resulted in the SA petrol price declining by R2.06/l on 6 May. However, because the Rand/Dollar exchange rate weakened substantially over the past month, the price decline was reduced by 33c/l.
The latest fuel price decline will provide another very welcome boost to households and the business sector, once the Covid-19 lock-down ends. In addition, the monthly inflation rate for May 2020 should fall by 0.5 percentage points, which is very significant, pulling the annual rate of inflation meaningfully lower. It is feasible that SA inflation will fall to around 3%y/y (or possibly lower) over the next couple of months, partly as a result of the lower petrol price.
The latest decline also means that over the past year the petrol price will have dropped by a substantial 26.7%y/y. This should encourage the Reserve Bank to consider a further cut in interest rates. Since the beginning of 2020 the SA Repo rate has fallen by a very welcome 2.25 percentage points. Of course the benefit of the lower petrol price as well as the sharp reduction in interest rates is being overridden by the current Covid-19 extended lockdown, but as mentioned above, the petrol price reduction and interest rate cuts could help to revitalise the SA economy once the virus is under control and the lockdown measures are more extensively lifted.