The Brent crude oil price has breached R985/bbl (and US$78.36/bbl) today versus R664/bbl (US$48.75/bbl) a year ago, and R799/bbl (US$67.50/bbl) at the start of April 2018. The rand has also depreciated on the month, leading to a current large petrol price increase of around 75c/litre building for June, after April’s increase of 72c/litre, and May’s 49c/litre rise.
Furthermore, the diesel price is currently set to rise by around 85c/litre in June, and illuminating paraffin by similar. The currently indicated petrol price increase for June, should it occur, would bring the pump price to over R15/litre, to R15.70/litre – an all time high, adding to consumer woes at a time when a multitude of consumer taxes inceases kicked in 1st April, including Vat.
Higher petrol prices feed through in the same month into the CPI, with CPI inflation likely to reach 5.0% y/y in June, if not above, from the current CPI inflation rate of 3.8% y/y that was published in April. The jump up is likely to pull CPI inflation to 6.0% y/y by November 2018, and so bring CPI inflation to average above 5.0% y/y for 2018.
2019 Is likely to see CPI inflation average 5.5% y/y, close to the upper limit of the inflation target in the MPC’s forecast period. This should scupper any chance of an interest rate cut at the upcoming MPC meeting at the end of this month. While rand weakness is likely currently overblown (see yesterday’s rand note, website address below), the risk is that the oil price rises further.
The oil price has risen significantly after President Trump abandoned a multi country nuclear deal with Iran, and threatened the highest level of US sanctions against Iran. Markets fear an escalation in geopolitical tensions in the middle east, and even a US led war with Iran, which would place further upwards pressure on oil prices, not last in anticipation.
Exogenous shocks, such as a sharp rise in the rand oil price tend not to lead to interest rate hikes, unless the rise is sustained and feeds into consumer price increases, i.e. develops into second round effects. With likely close to a R1.00/litre hike in the petrol price before mid-2018, retailers could already be considering the cost effects of such transport increases.
However, any fuel-led second round price hikes are only likely to materialise notably in the second half of 2018, and so the MPC is likely to not become materially concerned before then. Indeed, we expect interest rates to remain unchanged for the rest of the year. Should oil prices climb further towards the US$100/bbl mark, the MPC will likely become more concerned.
With the oil market already tight, and the US summer vacation/driving season due to kick off, uncertainty has risen somewhat over oil supplies meeting demand in the next few months, and price pressure is likely to be on the upside for this commodity. Furthermore the US President has warned that any country “that helps Iran in its quest for nuclear weapons” would likely also receive the highest level of US sanctions.
In addition, the sell-in-May-and-go-away, typically risk averse, seasonal phenomenon has hit EM currencies hard this year, with the rand seeing substantial weakness, as the Northern Hemisphere prepares for annual summer holidays (the bulk of the world financial wealth and activity is in the northern hemisphere) in a riskier global period (see “Rand outlook: Trade (and other) wars, Trump and the Fed funds hike trajectory - the US continues to influence the outlook for the rand”, 13th April 2018).
Markets however are assessing the likelihood of the US actually imposing the threatened sanctions, with the possibility that another agreement on a nuclear deal could be reached before the 180 days window period. Should this not occur, and the sanctions go ahead, and risks of a US middle-east war rise, this would likely translate into higher dollar oil prices, and so further fuel price hikes at the pumps for SA.
Indeed, with both oil price and rand volatility likely in the traditionally more risk averse period in the middle two quarters of the year, SA could see even more rand weakness if Trump heats up the rhetoric further. Recent tension with Syria/Russia have also spooked the markets, and could do so again if it resumes.
Additionally, the US has said it’s unlikely to exclude SA from steel and aluminium sanctions, while the conversation on expropriation without compensation in SA is now reported to be turning its focus to urban land, both of which has negatively impacted the rand, the latter due to the high level of uncertainty caused by the debate.
Domestic political developments remain as much a risk for the down and extreme down case as international risks do, and indeed the Trump effect on global risk assessments could cause a reassessment of the current probability weightings in the scenario table, to a greater tilt towards the downside. US led developments have been seen to be increasing the frequency of risk-off periods in global markets.
The opinions and views expressed are for information purposes only and are subject to change without notice. They should not be viewed as independent research, recommendations or investment advice of any nature.