Brent Crude futures, the global benchmark for the oil price, fell more than 10% in the first two days of trade in 2023 to below $80 a barrel. Late on Thursday, they were fetching around $78 a barrel.
Compared with its 2022 high reached in March in the immediate wake of Russia’s invasion of Ukraine, Brent Crude futures have tumbled about 35%. The most recent fall has been triggered by a number of factors, including jitters over the state of the Chinese economy as it remains gripped by Covid-19. China is the world’s top crude importer and so the relative health of its economy — and population, in this case — is a key driver of the price of oil.
A souring outlook for the global economy has also unleashed the oil market’s inner bear. Moody’s recently forecast a “slowcession” for the US for 2023, which sees the world’s largest economy avoiding a recession, but growing at a snail’s pace, as a brutal interest rate hiking cycle bites.
The International Monetary Fund late last year warned of a looming global slowdown, with a third of the global economy expected to tip into a recession. Oil price forecasts for 2023 have been cut by a range of institutions: the US Energy Information Agency, for example, in December revised its forecast for Brent Crude lower, to an average of $92 a barrel from $95.
It has since emerged that Opec lifted production in December, led by Nigeria and in defiance of the cartel’s commitment to cut output, so forecasts can be expected to be revised lower again.
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It’s early days yet, and if you can accurately predict oil’s performance in 2023, you stand to make a lot of money. But the bottom line is that, at the moment, the oil price does not have a lot going for it despite the ongoing conflict in Ukraine.
Oil’s pain is the South African consumer’s gain. Along with food prices, oil prices have been a scorching accelerant for domestic and global inflation. South African consumer inflation hit a 13-year high of 7.8% in July, a month when fuel prices were more than 50% higher than 12 months before.
Domestic price pressures have already started 2023 in retreat. South Africa’s petrol price at the pump fell on Wednesday by more than R2 a litre and almost R2.70 for diesel, a reflection of faltering global prices and mild rand gains in December. This should filter into the price pipeline and ease inflationary pressures.
A moderating oil price also has the potential for South Africa to widen its trade surplus again as the economy relies heavily on imports of the commodity. That in turn can contain inflation further by lending support to the rand, which extended recent gains on Wednesday to below R17/$ before backtracking on Thursday. A slower pace of domestic interest rate hikes will be a welcome consequence of this scenario if the trend remains in place.
The other edge of the sword is the point that a gloomy global economy — and especially China’s woes — is not supportive of the metals and minerals that South Africa exports.
Still, a falling oil price is a welcome respite for South Africa’s economy, not least because of Eskom’s diesel requirements to keep the lights on in its haphazard fashion. Consumers could certainly use the break. DM/BM