Oil collapse pushing inflation rate down
With demand for fuel down by 60% or more, four of SA's refineries have shut down
If you're not in the oil industry you may never have heard of Cushing, Oklahoma, population 7,000. The US town is the world's largest oil storage-tank farm, where multiple pipelines meet. This week it was at the centre of a historic moment when the oil price went negative.
With the Covid-19 disaster having shut down much of the world economy, demand for oil has collapsed and Cushing began running out of storage. Traders who had bought oil forward for delivery in May were so reluctant to take physical delivery they were willing to pay people to take it away. This was why the price of West Texas Intermediate for May 1 delivery briefly plunged to minus $40 a barrel.
The moment captured the dislocation in the global oil market when prices were savaged despite a commitment by oil producers in Opec to cut production by 10%.
The West Texas price is largely irrelevant to SA, where the reference price is that of Brent crude. But Brent, too, fell briefly below $20 a barrel this week, for the first time in decades, and even now is trading at just above $20 a barrel.
That's an economic bright spot for SA even if cheaper petrol isn't much use to motorists in the lockdown.
With demand for fuel down by 60% or more, four of SA's refineries have shut down, with only Sasol's Secunda plant and PetroSA in partial production.
Minerals & energy minister Gwede Mantashe has exempted refineries from the lockdown. The main reason for this, says South African Petroleum Industry Association CEO Abafani Tshifularo, is that refineries take up to two weeks to restart and will have to be ready as the economy starts up again.
And while many have suggested that this might be the moment for SA to rebuild the strategic fuel stockpiles that were sold, allegedly corruptly, in 2015, Tshifularo said SA would have to do so in terms of government policy. A 2013 strategic stocks petroleum policy draft has yet to be approved.
Cheaper fuel, however, can't do much directly to stimulate the locked-down economy, or help repair household finances.
But SA's inflation rate is already benefiting from lower oil prices and stands to benefit even more in the months to come. It will help to justify what most economists expect will be a further 25- to 50-basis-point interest rate cut at the Reserve Bank monetary policy committee's May and/or July meetings.
What matters to South Africans is the oil price in rands, but though the rand-dollar exchange rate has depreciated by a quarter this year, the dollar oil price has fallen even more, so the rand price is now about 40% lower than a year ago, says Old Mutual investment strategist Izak Odendaal.
"That's enough to push headline inflation down, probably to below 3%, even though petrol is only about 5% of the CPI basket," says Odendaal.
The March inflation rate, released this week, decreased to 4.1% from 4.6% in February, mainly because of fuel-price disinflation, after the petrol price declined by 19c/l on March 4. But April's numbers will again benefit and Investec economist Annabel Bishop now expects a R1.75 cut in the fuel price for May.
The Reserve Bank this month revised its inflation forecast down to 3.6% this year and 4.5% next year, on a Brent crude oil price assumption of an average of $42 this year and $45 next year.
It may have to cut its forecasts further, opening space for further interest rate cuts, as long as the weaker rand exchange rate doesn't do too much damage to inflation.
But with the government now seriously cash-strapped and looking for funds to close the yawning fiscal gap, there's a good chance of it taking advantage of lower prices to implement another hike in the fuel tax. Odendaal cautioned that consumers might not have the full benefit of lower fuel prices.
"I would not be surprised if government takes a big chunk of this when the minister tables his adjustment budget," he said.