The Christmas pinch

By Staff Writer


From Business Report
22 November 2007
By Tonny Mafu

South Africans are likely to face a painful double whammy, caught between rapidly escalating fuel prices on world markets and the strong possibility of further interest rate hikes imposed by the Reserve Bank to put the brakes on inflation.

US crude oil prices hit $99.29 (R675) a barrel yesterday as a weakening dollar and lower reserves in the US nudged it towards $100.

Consumers will have to dig deeper into their pockets to find a minimum of 32c a litre extra for petrol next month. But the crunch for the country's already stretched borrowers will be felt most keenly if the interest rates are increased, as expected. The Reserve Bank has warned that it will hike rates to fend off broadening inflationary pressures, which are, in part, fuelled by rising oil prices.

Consumer inflation breached the 3 percent to 6 percent target in April and has remained outside this range for six months. In September it shocked analysts by rising to 6.7 percent, well above the expected 6.3 percent.

Minister of finance Trevor Manuel has told the Group of 20 (G20) countries that insufficient global oil refining capacity would sustain the upward pressure on oil prices. The G20 economies forecast a gloomier inflation outlook.

Ridle Markus, a senior economist at Absa, said the high oil prices would result in a petrol price increase of at least 32c next month. "We can probably expect further hikes in January, unless oil eases and the rand strengthens further," he said.

After a strong rally from R7.50 a dollar in August to about R6.50 recently, the currency has begun to retreat. It fell to R6.81 yesterday and was bid at R6.794 at 5pm, 9.62c weaker than on Tuesday.

Chris Harmse, the chief economist at Dynamic Wealth, said the rand would have to appreciate by a larger margin for South African consumers to be cushioned against high oil prices. A rise of $1 a barrel in the oil price will increase petrol prices by about 7c a litre, which can only be balanced out if the rand appreciates by 30c.

Old Mutual Investment Group South Africa oil analyst Mandla Mapondera said supply constraints were responsible for the price rally: "The probability of going higher than $100 is higher than it going back to $60."

According to Reuters, oil prices have risen 45 percent since mid-August. The Opec producers' cartel has blamed the gains on speculation - futures traders taking bets based on assumptions of a higher price.

Jeff Gable, the head of research at Absa Capital, dismissed the Opec claim. Global reserves are low compared with past years, with higher demand expected during the approaching US winter. The US is the largest consumer of crude oil.

Gable said the supply response to increasing demand had been modest.

Mapondera said earlier expectations for higher production from non-Opec producers such as Russia had come to nought. Rebel attacks in Opec member Nigeria had led to losses of 1 million barrels a day.

The world uses 87 million barrels a day, but Mapondera said it could do with more.

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