Oil and trouble: what lies ahead for SA fuel prices in 2023?

Years gone by have more often than not been characterised by steep oil price movements.

Who could forget 2021 as the year when oil prices turned negative when storage reached capacity, causing traders to pay others to take oil off their hands because they could not take delivery of the product.

In 2022, the oil price rocketed past $125 a barrel when Russia did the unthinkable and invaded Ukraine. The war disrupted regional energy supply chains, sending shockwaves through the global market with resultant high fuel prices stirring unrest across the world and fuel-related protests gripping several countries.

In South Africa too, government came under immense pressure in 2022 to buffer consumers from fuel price hikes, and ultimately sold off a chunk of the country’s strategic crude oil stocks to fund a temporary reduction in the fuel levy.

Then, as global diesel supply constraints pushed prices higher in the fourth quarter of the year, South Africa’s dwindling refining capacity again came sharply into focus.

Anyone’s guess 

Concern has also been growing over increased fuel imports which are reaching unprecedented levels now that Sapref, the largest refinery in Southern Africa, closed its doors early in 2022. Government’s plans to take over Sapref also seem to have fallen flat after devastating floods in KwaZulu-Natal caused severe damage to the plant.

Now, as oil prices languish at $86 a barrel over recession fears, what 2023 might hold is anyone’s guess.

It is, however, something most businesses need to at least attempt to forecast, Kramer says.

In its latest forecast, the Energy Information Administration in the US predicts a more stable year ahead.

The agency expects global oil inventories to fall by 0.2 million barrels per day in the first half of 2023, before rising by almost 0.7 million barrels per day in the year’s second half.

This “results in our Brent crude oil price forecast averaging $92 per barrel in 2023, $3 per barrel less than we had forecast last month”, the EIA said.

The Bank of America Global Research, however, expects Brent crude oil prices to average $100 per barrel in 2023, driven also by demand recovery in China as a result of the economy’s post-COVID reopening and a drop in Russian supplies of about one million barrels per day as a result of European Union sanctions.

The bank also reportedly said Opec+ could implement a production cut of two million barrels per day in a bid to support prices.

Craig Erlam, senior market analyst at Oanda, says the risks to the oil price are tilted to the upside.

“While producers have finally caught up with post-pandemic demand, other risks remain next year, notably Russian output amid the new price cap [imposed by G7 nations] and its threats to cut output and not supply any countries abiding by it. That isn’t a problem now, but if prices do start rising, that could accelerate the move quickly,” Erlam writes in a note.

In South Africa, high oil prices will always translate into higher fuel prices. And, as was discovered this year when panic set in over rising costs, there is little room to manoeuvre to bring fuel prices down.

Deregulation? 

Although a 1998 White Paper on energy proposed deregulation of the fuel price, government has failed to commit to it. The DMRE, in June last year, however, invited comment on its intention to introduce a price cap for 93 octane. If implemented, such a reform would allow retailers to discount petrol however they see fit, which would drive prices down for fuel consumers.

On the refining side, there is some good news, as one refinery is due to come back online.

As Glencore CEO Gary Nagle confirmed to News24 last month, the new and improved Astron Energy refinery would be up and running before the end of 2022 and supplying fuel into the South African market in 2023.

“It is starting up this month, and we look forward to providing domestically produced product into the South African market,” he said in early December.

The 100 000 barrel-a-day refinery – previously-owned by Chevron SA – has been offline since a deadly fire forced its doors shut in mid-2020.

The refurbished plant will be able to produce additional products and, over time, could produce fuels that comply with South Africa’s incoming clean-fuel legislation.

This will, of course, have no impact on the fuel price, which is regulated, but it is a significant building block for the Western Cape, Kramer says.

“It is good news for the local economy and for manufacturing, especially because by-products like LPG, bitumen, jet fuel, and so on, which, when the refineries are closed, all have to be imported,” he says.

The development also bucks a trend of increasing refinery closures in favour of fuel imports which has caused the South African Petroleum Industry Association (Sapia) to warn that the capacity of South Africa’s fuel import infrastructure is nearing its limits.