Brent crude retreats, but October fuel-price increases remain likely

Brent crude oil prices have dipped recently, but this does not guarantee South Africans will evade fuel-price hikes in October. The price of Brent crude remains above $100 per barrel, trading at $101.08 per barrel on Monday. For South Africa, fuel price increases could reach R2.78 per litre for petrol and R3.00 per litre for diesel at the start of October.

The government has not announced any immediate measures to protect consumers from rising fuel costs, as confirmed by Mineral and Energy Minister Gwede Mantashe in Parliament.

Global oil markets have shown signs of recovery due to increased Middle East supply and high flows in the Strait of Hormuz, according to Bianca Botes, managing director of Citadel Global. Despite this, the ongoing Gulf conflict remains a factor. Gold prices are stable, and the dollar has strengthened near recent highs following last week's Federal Reserve rate hike.

Dr Lerato Ntuli, an economist at Anchor Capital, noted that Brent crude has fallen from around $106 per barrel in mid-September to near $102 per barrel due to signs of reduced regional tensions and alternative shipping routes. South Africa's fuel prices are based on daily calculations from the Central Energy Fund, with monthly adjustments made from the average daily price and exchange rate.

This means domestic fuel prices typically lag behind international price movements by about a month. With the October review period nearing completion, most of the month's pricing is already determined, limiting the impact of the recent oil price decline on October fuel prices.

However, if Brent crude remains at its current level or drops further before the end of October, and there is no geopolitical escalation or significant weakening of the rand, the next fuel price review could start from a lower base, providing more room for relief later in the year. The rand is currently around R16.30 per US dollar, showing relative resilience despite the recent oil shock.

Still, risks to the currency have grown, as the Federal Reserve's tightening cycle has narrowed the interest-rate differential between South Africa and the US. With a nominal yield advantage of 3.25% for South Africa compared to 3.75%-4.00% for the US, any additional Fed rate hikes later this year could further compress this advantage, potentially reducing support for the rand.

While Brent crude prices have retreated from recent highs, they are still about 13% higher than at the end of August. The elevated oil prices, along with a stronger US dollar, could increase the risk of imported inflation through higher fuel and transport costs. The August inflation print may not fully capture the fuel shock currently affecting the economy, as the most significant petrol price increases will not be reflected in the September CPI data.

Instead, the October fuel price increase will likely appear in the October inflation figures released in November. A significant portion of the fuel-driven inflation remains in the pipeline, and Ntuli predicts that the South African Reserve Bank (Sarb) will raise the repo rate by 25 basis points at its upcoming Monetary Policy Committee meeting.

Factors such as high oil prices, persistent core inflation, potential rand weakness, and a more hawkish Federal Reserve support this precautionary tightening stance. The rand strengthened in Monday's trading, supported by the drop in oil prices and steadier global risk appetite, with market focus shifting to Wednesday's Reserve Bank rate decision.