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Fuel price: Beware of inflation, greed, politics

Jan 27 2015 14:40
Carin Smith

Cape Town - Consumers should beware of inflation, greed and politics before they become too excited about the sustainability of low fuel prices in South Africa, warns Daryl Ducasse, a risk analyst at Merkurius Capital Solutions.

The crude oil price has broader implications. It is the macro view that must be considered - market manipulation, events, anomalies and corresponding events. Although it is likely the price could weaken further, it is inevitable that it will start a steady climb back up again, finding support at mid to high $50 per barrel (bbl), $70/bbl and potentially breaching its previous, sustained highs of about $130/bbl.

"Think of it like this: We live in a world where the price of crude could actually be $49/bbl instead of the $144/bbl high it reached in July 2008. The only reasons why that low pricing level would not be sustainable are inflation, greed and politics," Ducasse told Fin24.
 
"In my view, it’s not the petrol price that is of significance. It is the price of Brent crude oil, SA's exchange rate, our inflation rate, our dependency on imports and our modest year-on-year growth. These are interwoven."

He explained that inflation comes as a result of the direct, rising cost of delivering the product to market.

"Greed comes out of the trading environment relating to profit-taking. Huge pressure is brought to markets as a result and that, therefore, creates a reaction - smart traders profit from the emotionally driven buying and selling," he said.

As for the impact of politics, Ducasse said the US especially, is fighting for its position as an apex nation, Russia’s counter-strategy to sanctions imposed on it indicates the possibility of instability in that region, and China is seeking to expand its influence and access to resources - aside from Opec’s position on supply.

These are all factors which could lead to pricing being used as a deterrent against policy and ambition.

"It’s a game and we are mere mortals underfoot the gods of the capital markets. Proof? No, I have no proof, but this is an educated opinion," said Ducasse.

READ: Record 127c drop in petrol price

The data tells the story: There is a correlation between crude oil, resources, dollar strength, the markets - and human behaviour.

"In my view, the markets were manipulated heavily back in 2008, and they have been over the last year. Irrational exuberance was the phrase used by former US Federal Reserve chair Alan Greenspan. This was in reference to the dotcom bubble, but was also relevant in 2008 - as I believe it is now," said Ducasse.

"The sub-prime market was blamed for the erosion of global capital back then, but it wasn’t the only culprit. Governments brought countries to their knees in bankruptcy."  

To him the graphs tell a story of "carefully manipulated play - knowing that emotions are behind the triggers of each inexperienced day trader and investor’s trading decision".

Effect on consumers of fuel

South Africa has an opportunity to become self-reliant and to grow – "if only it would change its’ grossly racist, greedy, morally and politically corrupt ways, and start focusing on our future as a nation", Ducasse said.

"Irrelevant of what the fuel price is, it’s all relative to net disposable income (and growth in that income), relative to inflation," explains Ducasse.

"We are having a discussion about the price of a product only because it affects us financially in so many ways. The real issue is how you will react or let it affect you in the future."

READ: Lower fuel prices boon for consumers


Impact on the economy

Economist Rob Price of ETM Analytics told Fin24 the exact impact of the lower fuel price on the SA economy is difficult to estimate.

"I would estimate that there is the possibility of anywhere between a 1% to 2.5% positive impact on the economy from the drop in the price of fuel," he said.

There is, however, a number of important caveats to consider.

Firstly, there is increased demand for petrol due both the public and the private sector compensating for Eskom power outages.

Secondly, power outages are a certainty over the coming quarters, which will have a drastic impact on economic growth.

Thirdly, global economic growth is unsupportive. Both the IMF and World Bank have downwardly revised their growth forecasts in recent weeks.

"We expect real gross domestic product (GDP) growth could still be capped at about 2.5% year-on-year in 2015, with notable downside risks to this scenario if the Eskom debacle continues to deteriorate," he concluded.

ALSO READ: Petrol price could drop by R1 - expert



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petrol price  |  sa economy  |  oil

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