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Oil spikes to six-month high, here’s what it means for SA
As oil prices hit a six month high, yesterday the United States government ended all waivers on Iranian oil exports. This has resulted in a halt for a key revenue source for the Islamic state as well as a sharp hike in crude oil prices. Tsitsi Hatendi-Matika, Head of Retail Investment Specialist at Absa's Wealth and Investment Management joins CNBC Africa for more.
Tue, 23 Apr 2019 10:54:07 GMT
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AI Generated Summary
- The surge in oil prices is expected to lead to fuel price increases and potential inflationary pressures, affecting South Africa's imports, current account deficit, and overall economic stability.
- The uncertainty surrounding major oil exporters' ability to fill the supply gap left by Iran and the reliance on OPEC to stabilize oil prices present challenges for market stability and economic forecasting.
- The upcoming elections in South Africa add another layer of complexity to the economic landscape, with concerns about the Reserve Bank's mandate, consumer confidence, and the potential impact on inflation levels and exchange rates.
As oil prices hit a six-month high following the United States government's decision to end all waivers on Iranian oil exports, concerns are rising about the impact on various economies, including South Africa's. The move has resulted in a halt to a key revenue source for Iran and a significant hike in crude oil prices, prompting a discussion on the short-term and long-term effects of this development. Tsitsi Hatendi-Matika, Head of Retail Investment Specialist at Absa's Wealth and Investment Management, shared insights on the implications of the spike in oil prices for South Africa in an interview with CNBC Africa.
In the short term, the surge in oil prices is expected to lead to fuel price increases, which could trickle down to higher food prices and potentially impact interest rates in the long term. This could have a significant effect on South Africa's imports, current account deficit, and overall economic stability. Given that Iran, a major oil exporter, is now producing significantly fewer barrels per day due to the US sanctions, there is a concern about the gap in supply and whether other major exporters like Saudi Arabia can fill this void effectively. The uncertainty surrounding OPEC's meeting in June and the lack of communication from Saudi Arabia on increasing production levels add to the volatility in the oil market.
While there is hope that the US could step in to stabilize oil prices, it is unlikely that they can entirely cover the deficit left by Iran. President Donald Trump's reliance on OPEC to bridge the gap reflects a short-term approach that may not address the broader implications of the oil price surge. The impact of rising oil prices on inflation and the overall economy is a key concern for the Reserve Bank, especially as it considers future interest rate decisions. With oil prices crossing the $70 per barrel mark and the weakening of the South African Rand, there is growing pressure on fuel prices and inflation rates.
Looking ahead to the upcoming elections, economists are closely monitoring consumer confidence, inflation trends, and the potential impact on the economy post-elections. The uncertainty surrounding the political landscape adds another layer of complexity to the economic outlook, with calls for a stronger Rand post-elections and concerns about the Reserve Bank's mandate amidst growing economic challenges. The role of the Reserve Bank in managing inflation, exchange rates, and economic stability becomes even more critical in a volatile market environment.
As South Africa grapples with the repercussions of the oil price spike, there are apprehensions about the impact on producer price inflation (PPI) and the potential for cost-cutting measures, including job losses, to offset rising expenses. Companies that rely heavily on fuel as a primary input face mounting challenges, with the negative effects of cost increases outweighing any potential benefits. The strain on both consumers and the broader economy highlights the urgent need for proactive measures to mitigate the adverse effects of the oil price surge.
In forecasting the future trajectory of the Rand, Absa's Wealth and Investment Management anticipates the currency to remain around the 14 mark, considering various market dynamics and economic factors. However, the outcome of the elections and the subsequent political landscape could introduce volatility and potentially push the Rand to higher levels if market sentiments turn negative. The uncertainty surrounding 'black swan events' and extreme scenarios post-elections underscores the need for a cautious approach in evaluating the Rand's performance and South Africa's economic resilience in the face of external shocks.
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