Nicola Mawson
As tensions in the Middle East escalate, with Iran’s Kharg oil terminal being shut and potential disruptions to the transport of oil via the Strait of Hormuz on the cards, the price of oil is rising and could quash any chance of another fuel price cut next month.
At the same time, the rand continued losing its gains yesterday as the US Federal Reserve (Fed) becomes more cautious on rate cuts, which has benefited the dollar. Yesterday, having started the day at R17.59 against the US dollar, the rand weakened 0.6% to R17.66 by 4pm.
This, economists noted, meant a higher spike in oil prices in the local currency. In South Africa, fuel prices have been cut for five consecutive months until October.
Brent crude oil has been steadily increasing, going from around $71 a barrel on September 9 to $77 a barrel during the day yesterday. The US Energy Information Administration now expects an average of $89 a barrel this half against $84 a barrel in the first six months of the year.
Mark Lacey, head of thematic equities at Schroders, said: “it is impossible to say whether the terrible conflict in the Middle East will deteriorate further, but recent articles and political commentary… point to a risk that global oil markets and global gas markets could be severely disrupted over the coming months”.
Citing news such as Iran shutting down its massive Kharg oil terminal, the potential that it may not be possible to transport oil through the Strait of Hormuz – between the Persian Gulf and the Gulf of Oman and through which 20% of oil passes – Lacey said in a note yesterday that expected oil prices to be in a range of $65 a barrel to $85 a barrel.
Li Xing, financial markets strategist consultant to Exness, noted, however, that “weak demand fundamentals suggest a bearish outlook for oil prices in the medium to long term”.
Investec chief economist, Annabel Bishop, said that Brent crude oil moved above $80 a barrel this week, taking it to above R1 400 a barrel as the rand also weakened. This, she explained meant that the potential petrol price cut for November now eroded from over R1.00/litre to 39c/litre.
The rand remains a volatile currency, reaching R17.64/$1 on the escalation in geopolitical tensions, from R17.03/$1 at the end of September, with a cautious tone from the Fed on the pace of US interest rate cuts also a factor, said Bishop.
Yet, Jimmy Moyaha, founder and managing director of Lebowa Capital, told Business Report that the oil price was below $80 a barrel and the rand was holding its ground, so “there shouldn't be too much movement in the petrol conversation at the moment”.
Old Mutual Group chief economist, Johann Els, said his concern was traders stockpiling oil, which would see an increase in the price. In addition, a “real breakout of a Middle East war” could push oil as high as $120 a barrel. “In that scenario, that creates a global recession,” he told Business Report.
However, said Els, the Fed will step in and push money into the system to protect the US economy, which will help the global economy.
“I think, apart from Iran and Israel, everybody else don't want to go to war. So, for the moment, lots of uncertainty, lots of volatility that will have an impact,” he said.
Despite this, Els expects the rand to continue to strengthen off the back of a weaker dollar over the next three to six months.
Izak Odendaal, chief investment strategist at Old Mutual Wealth, said that the big driver of markets now is probably the repricing of the US interest rate outlook following Friday’s strong labour market data.
“With fewer rate cuts now expected, the dollar has perked up, putting downward pressure on the rand, gold, and oil,” Odendaal said.
BUSINESS REPORT