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Fuel price R20 per litre not far off

The two hefty increases in the petrol price in April and May have resulted in the highest fuel prices ever in SA. While it has hit motorists hard – the high price of R14.72 translates into a monthly bill of R2 000 to R3 000 for most motorists – obviously depending on how much you drive and how big your car is, more bad news is waiting. The petrol price could hit R20 per litre before the end of next year.

South Africans can expect further continued increases in petrol prices towards the end of the year and next year as the rand is forecast to weaken further, while oil prices are expected to continue to increase.

In the past, we were mostly saved by either a strong rand when the oil price was high, or low oil prices whenever the rand was weak. For instance, when the rand remained above R15 to the dollar from end November 2015 until June 2016, the oil price was very low at around $45 per barrel.

When the oil price reached its historic high of $148 during the commodity boom of 2008, the rand was very strong at around R7 to the dollar. Luckily this tempered the effect of high crude prices on the local fuel price.

But forecasts show that the rand is set to weaken over the next few years, while predictions for the oil market indicate much higher oil prices over the next few years. The outlook for the petrol price is ominous, even considering that forecasting exchange rates and commodity prices are very difficult.

The oil price broke out of its narrow trading range of between $40 and $50 some eight months ago and has since increased to above $74. Forecasting the oil price is notoriously dangerous, but most analysts seem to take Opec’s latest indications of even higher prices seriously.

A forecast of oil at around $100 per barrel seems reasonable as long as the world economic recovery continues. The New York-based Trading Economics forecasts oil at $97 per barrel at the end of December and at $102 at the end of 2019. It expects a high of $124 in July 2020 and then a slump back to $100.

The rand is expected to continue its weaker trend of the last few weeks. It is expected to end the year at R13.24 per dollar compared to the current R12.60. According to Trading Economics, the rand would end 2019 on R13.72 and continue weakening to around R15.81 at the end of 2020.

It is important to note that these forecasts exclude any huge economic shocks or political upheaval as forecasts for SA interest rates, inflation and economic growth show only small changes. Trading Economics expects GDP growth to improve from the latest 1.5% to 1.9% towards year end and exceed 2% in 2019 and 2020.

Interest rates on government bonds are expected to increase slightly from current levels of around 8.34% to 8.7% at the end of the year and to around 9.8% at the end of 2020. Forecasts for inflation, fixed domestic investment, the level of government debt and business confidence all paint a picture of a gradual improvement in the economy and economic stability.

Any significant deterioration in the economic environment will weaken the rand much quicker.

These quite conservative estimates for the rand and oil price could see an increase in SA fuel prices to at least R17.30 per litre at the end of this year. And it can increase to above R20 per litre before the end of next year. This assumes an average oil price of $100 and an exchange rate of $13.20, as well as increases of around 10% in all the different taxes, levies, transport cost and industry margins.

It might be best to forget about that new car with its powerful and thirsty 5.7-litre V8 double-turbo engine and rather investigate an investment in petrol futures.

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