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Petrol price could drop by R1/litre in February (that’s R4/litre since August!)

Also read the following related article:

- Buy Sasol shares (not despite, but because of, very cheap oil) – market analyst

The price of oil dropped below US$45 per barrel for the first time since 2009 and petrol could, according to economist Mike Schüssler, fall by a rand a litre in February.

Excuse my dance of joy…

If Schüssler’s prediction turns out to be true (it usually does) it would mean that the price of petrol has dropped by more than R4 a litre since August 2014. R4 per litre!

If you drove a small car with a 50-litre petrol tank you’ll be saving R200 every single time you fill up!

“The oil price’s slump has been dramatic, falling by 20 percent just this past month,” says Kevin Lings, Chief Economist of Stanlib Asset Management. “It’s down 59 percent since June last year. Unfortunately the rand has weakened, thereby offsetting some of that benefit,” says Lings.

The two main consequences for South Africa of the sharp drop in the oil price are:

1. Inflation will come down

Consumer Price Inflation, currently at 5.8 percent, is likely to fall below four percent in the coming months. “The Reserve Bank should be comfortable in holding interest rates where they are,” says Lings.

2. We have more money to spend

“I don’t think South African consumers will save all that extra money,” says Lings. “Hopefully they won’t take on extra debt."

Enjoy the party while it lasts…

“Commodities tend to overreact on the up and down,” says Lings. “This is an overreaction in the oil market.”

There are, however, some “fundamentals” driving the downward slide in the oil price. “There certainly have been increased supplies while demand has fallen at the same time,” explains Lings.

“But the overreaction is a factor of the unwinding of positions that has been taken in the oil market. This is unsustainable.”

US$40 per barrel = no exploration or new investment (and higher prices in future)

The oil price is currently too low to encourage new exploration or investment in oil production. Very low prices today will inevitably lead to less supply and higher prices in future.

“These prices cannot be maintained. The market expects oil around US$60/US$70 a barrel in 12 to 18 months,” says Lings. “We won’t, however, see prices back at US$110 any time soon.”

An opportunity to hike taxes

Finance Minister Nene has made it clear he needs up to an extra R15-billion. We’ve become used to modest tax breaks over the past few years, but the petrol price bonanza opens the door for Nene to slip through some tax hikes without causing too much pain.

“If our growth rate doesn’t improve we’re faced with the prospect of tax hikes in the next few years,” warns Lings. “Despite tax hikes, I’m hoping there’ll still be a net benefit to the oil price's fall for taxpayers.”

If only we had more electricity…

“We could’ve been in a very favorable position if we had enough electricity. Companies don’t want to expand if they’re unsure about power supplies."

Also read the following related article:

- Buy Sasol shares (not despite, but because of, very cheap oil) – market analyst

Listen to the Soundcloud clip for more detail as well as an interview with a petrol station owner on the impact of cheaper oil on his business.

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