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Explaining the petrol price hike

After six successive monthly decreases in the price of petrol, higher international product prices throughout January have pushed local prices up again in February, by around 60c/litre (cpl). Diesel prices, however, have dropped for a seventh consecutive time.
Source: DME
Source: DME
click to enlarge


Engen Petroleum's GM of Corporate Planning, Dave Wright, says upward movements in the price of petrol are often questioned as a result of some common misunderstandings.

He says the biggest confusion, one that recurred in the past week, is the assumption that the price of international crude oil alone determines the price of fuel.

“While there is a strong correlation, crude is not the only factor,” he explains.

“Our prices are influenced by many factors, including global demand, refining capacity (supply), freight rates and competition in different markets.

The most influential factors are, firstly, the price of international petrol and diesel, and secondly, the rand-dollar exchange rate.”

International parity

Singaporean and Mediterranean prices are used to calculate the basic petrol price (and Arabian Gulf and Mediterranean prices determine the local price of diesel and illuminating paraffin).

Wright says international petrol prices rose by as much as 61.5 cpl during January. “The rand strengthened only marginally against the dollar (accounting for a drop of only 0.5 cpl), so international prices were the dominant factor in the latest price movement,” he says.

Why the big movement? Wright says global prices were uncharacteristically low to begin with, due to a massive excess of product after a sudden drop in demand (caused by the worldwide economic slump).

“This supply overhang has now been corrected by global refineries cutting back on supply, and demand has begun to pick up too.”

Expected rise

Engen expects petrol prices to rise again in March, by some 18-20 cpl, caused by a continued rise in international prices, counteracted by a strengthening rand.

“How this combination of factors pans out over the rest of the month will determine the price movement for March.”

Beyond March it is difficult to foretell, given the complex variations possible in these factors. Even if the rand doesn't weaken against the dollar, we may unfortunately see increases up to August again, Wright warns.

The reason? The Northern hemisphere is moving into its summer, which will increase demand for petrol.

The diesel equation

As for diesel, matters are somewhat different, causing an unusual divergence in the petrol and diesel price trends.

In February, diesel showed a minimal decrease (5-7 cpl), caused by lower international prices.

That, in turn, was caused by lower crude oil prices, and a small over-supply.

Based on current data, diesel may fall yet again in March, by around 20 cpl, mostly due to lower international prices, but also to a stronger rand.

Beyond March, Engen expects international diesel prices to stay soft, due to a continuing drop in demand. The company sees very limited movement - perhaps a small drop - in the future of diesel, Wright concludes.

By August, demand all over the world should pick up, leading to price increases until year-end.

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