JOHANNESBURG – South Africa is set to benefit from the volatility in the global oil price, with fuel set to come down about R3 per litre in May following the R1 cut this month.
Vestact Asset Management portfolio manager Michael Treherne said the slump in Brent crude oil prices had defied the country’s weak currency.
Treherne said South Africans could be poised for more fuel price reductions in the future
He said this would leave the country’s cash-strapped consumers with more money to spend.
“This means people have more money to spend elsewhere in the economy, which is much needed at the moment,” Treherne said. “Added to that, low oil prices means that inflation locally should also drop, giving the South African Reserve Bank more room to drop the interest rate, which in turn will be great assistance to our economy.”
The US benchmark West Texas Intermediate (WTI) fell to -$40.32 a barrel on Monday from more than $60 a barrel at the beginning of the year, forcing producers to offload stock instead of paying exorbitant prices for storage.
Oil prices collapsed mainly on the disagreements within the Organisation of Petroleum Exporting Countries (Opec), the continuing stand-off between Russia and Saudi Arabia as well as fears over the impact of coronavirus on the global economy.
This week, Opec, Russia and a group of other oil-producing countries agreed to reduce production by a record 10 million barrels beginning in May.
However Treherne said the move was unlikely to stem the tide as the market was likely to remain with too much supply.
In the US many shale oil producers have canceled drilling plans, while others have been forced to shut down active wells.
“What we don’t know yet is how many fracking operations in the US will close,” Treherne said. “The forecast from the International Energy Agency last week, was for the globe to be oversupplied by 10% for the rest of the year. Even if demand and supply level out, the globe still needs to make its way through all the oil in storage. More than likely the oil price will remain under pressure for the rest of the year. At these low prices, many producers are under pressure. So in time though, the oil price should drift higher.”
The WTI price bounced back to $16 a barrel on Thursday after US president Donald Trump threatened to destroy Iranian gunboat ships that harassed US ships in the Persian Gulf.
Izak Odendaal, an investment analyst at Old Mutual Wealth, said the fundamental over-supply of oil remained in place.
“We can expect prices to remain low and volatile in the next few weeks until there is a better view of how quickly the world economy can come out of lockdown,” said Odendaal adding that the best cure for low prices was low prices. “In other words, at very low prices, many oil wells are unprofitable and these are then shut down, taking excess supply off the market.
How quickly this happens will depend on the extent to which producers hedged themselves.”