West Texas Intermediate (WTI) and Brent crude have both jumped around 15% since last week. WTI is the benchmark for US-produced oil, while Brent is the global pricing reference for light crude and the main benchmark for South Africa’s imports.
On 2 March, South Africa’s Central Energy Fund (CEF) released the latest daily fuel price estimate since the strikes on Iran this weekend, and shows a 78c/litre increase in the daily fuel price estimate, on the back of the jump in the oil price.
Fuel prices are only adjusted once a month in South Africa, on the first Wednesday of the month, and are calculated on the average rand petroleum product price for the previous month, excluding any changes in fuel taxes and levies.
For a 78c/litre rise in the petrol price next month, the daily fuel price estimate would then have to remain at this rate on average over March, with volatility likely and the US reportedly warning of the war lasting for four to five weeks.
Iran has retaliated by firing on US military bases and other US targets in the United Arab Emirates (UAE) and other countries in the Gulf region, which are estimated to contain 50% of the world’s oil reserves, although the Gulf states have not retaliated yet.
However, the situation remains volatile, and the Gulf Cooperation Council (GCC), comprising of Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the UAE, are discussing self-defence and the option to respond to Iran attacks.
Oil prices have risen somewhat in high uncertainty, with Brent now above US$80/bbl, and the Strait of Hormuz reported closed as Iran threatens attacks on passing vessels, lifting oil tanker rates sharply above last year’s spike.
With the risk of Brent sustaining levels above US$100 per barrel still low, a temporary breach remains possible and would be in a marked risk-off environment, with rand weakness and dollar strength.
However, Saudi Arabia is already increasing production and exports to stabilise oil markets and OPEC is looking to boost supply, already agreeing to increase quotas on Sunday to soothe oil markets, but now potentially quadrupling extra supply.
Supply cushions the shock, transport the real risk
A large jump in oil supply, particularly exports, in what was already expected to be an already over-supplied market this year, substantially reduces the chance of the oil price breaching US$100/bbl for a sustained period.
The Strait of Hormuz is estimated to carry about 30% of global seaborne oil traffic, and it is from the transport of exports that the risk lies for the oil price, and less the production of oil itself as major producers are typically all increasing supply.
With movements through the Gulf constrained, this would likely be the main source of upward pressure on oil prices. Saudi Arabia and the UAE can reroute some exports to the Red Sea via pipelines, although Houthi attacks there pose additional risks there.
However, this would only partially meet demand. Further US or Israeli strikes could intensify the conflict, potentially hastening its end but more likely resulting in a temporary spike in oil prices rather than a sustained surge.
An intensification of the Iranian war in the Middle East would increase financial market risk aversion and cause the US dollar to strengthen (along with the gold price and Swiss Franc) on their retained safe haven status in times of uncertainty.
With risk-off sentiment prevailing in global financial markets, investors tend to grow more cautious about the economic outlook, shifting into safer assets and typically reducing exposure to emerging markets.
The current move into risk-off over the weekend and into this week is expected to be relatively temporary, potentially lasting through this month and into early April, with a low probability of a severe and sustained escalation over the year.
An oil price above US$100 per barrel is therefore unlikely to be sustained, with any move higher expected to prove a temporary shock. In that scenario, the SARB’s Monetary Policy Committee (MPC) would likely look through the spike rather than respond with higher interest rates.
Our base case does not foresee tensions persisting or spreading across the Middle East. That said, the risk has edged slightly higher, though it remains an extremely low probability.
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