By: Justicia Shipena
The South African rand’s weakness and the lockdown in China pose threats to further fuel hikes beyond June in Namibia, a Simonis Storms report on fuel price announcement for June reveals.
According to the report, oil prices moderated slightly between April and May, and the rand’s weakness drove under-recoveries higher.
“Rand weakness and the eventual lifting of lockdown restrictions in China pose threats to future fuel price hikes in Namibia,” the report reads.
This comes after Monday, the mines and energy ministry announced an increase in fuel prices, with petrol increased to N$20.40 and diesel at N$21.43 as of 1 June.
The report states that the rand averaged 15.91 against the US dollar in May, compared to 15.04 in April.
“The rand has strengthened by 1.4 per cent,” it said.
It added that the rand outlook appears closer to Namibia’s worst-case scenario as published in their Quarterly Economic Review report.
The Quarterly Economic Review Report forecasts an average Rand exchange rate of 15.80 against the US dollar in the second quarter of 2022.
Hence, a weaker rand, coupled with elevated Brent crude prices, will maintain upward pressure on local fuel prices in the coming months.
Upon announcing an increase in fuel prices, the mines and energy ministry also said it had recorded under-recoveries.
“May’s under-recoveries amounted to N$179 million, which will be paid by the National Energy Fund (NEF). This is the largest under-recovery recorded on petrol in the last 12-months and second-highest for diesel,” the report reads.
Moreover, Simonis Storms said that during May, Brent crude oil prices increased from US $107.58 to $117.40.
“West Texas Intermediate increased from $106.02 to $114.74 during the same period.”
It further shows that West Texas Intermediate prices were above Brent crude from 13 to 20 May 2022.
Thus, according to Investec, Brent crude prices are expected to average the US $107/b in the second quarter of 2022 and US $103/b in the second half of 2022.
“Lower refining capacity in the US and other countries have kept gasoline and other oil product prices high,” the report reads.
Additionally, it said gas shortages and higher gas prices made burning diesel for power production more cost-effective than burning gas. This has led to an increase in diesel demand, according to Investec.
However, new capacities are expected to be operational in 2023.
The report also said refining capacity has been constrained due to conversions to import terminals and the disposal of outdated infrastructure that could not produce compliant fuels in various countries.
“Closure and downsizing of American refineries following the pandemic have lowered American supply. American refineries have not invested in expanding existing capacity or acquiring idled plants that can be reopened due to record profits from the current situation and because new refineries take a while to return profits.”
Furthermore, oil giant Aramco reported an 82 per cent increase in net income.
“This is a new quarterly earnings record since its Initial Public Offering and was supported by rising volumes sold, improved downstream margins and higher crude oil prices,” it said.
Earnings from Aramco’s peers such as BP and Shell have hit their highest level in years, despite incurring write-downs for exiting operations in Russia.
“Aramco’s market capitalisation at USD 3.7 trillion has surpassed Apple as the most valuable company globally.”
Simonis Storms added that with no major expansion plans on the horizon, the mismatch between demand and supply will widen and support higher prices in the short term.
While the Energy Information Administration (EIA) estimates that demand will remain elevated until the fourth quarter of 2022.
“After that, demand is likely to flatten out at pre-pandemic levels,” it stated.
This demand, the report says, is forecasted to overshoot production until the fourth quarter of 2022.
“This should keep global Brent crude prices elevated.”
It concluded that the demand is likely to be supported by a rise in air travel during the Northern hemisphere’s Summer season and easing lockdown restrictions in China.
