Black gold loses its shine

Opec’s decision to keep production levels high pushes down the price of crude, which is good news for SA

Consumers can look forward to stable interest rates and lower increases in prices in the next few months, thanks to a decision by oil producing countries not to pull back on production.

Last week, the Organization of the Petroleum Exporting Countries (Opec) opted to maintain its current production level of 30?million barrels a day, dashing hopes it would narrow production in response to rapid declines in oil prices and a market oversupply.

The oil price reacted, falling 6.6% to $72.58 a barrel in Europe.

Economists told City Press the oil price drop was good for locals.

Nedbank’s Isaac Matshego said: “We are likely to see further fuel price reductions if the rand exchange rate holds steady. Lower fuel prices will feed through to lower overall inflation, with food inflation in particular moderated by lower production costs.”

Reserve Bank governor Lesetja Kganyago said last month inflation was at 5.9% in October. Food inflation measured 8%.

Last week, the energy department announced the price of all grades of fuel would fall by 69c a litre this month, meaning inland motorists would pay R12.47 for a litre of petrol, while those at the coast will pay R12.06.

Alex Smith, an economist at FNB, said a sharp drop in the oil price, if sustained, would lead to further petrol price cuts – in turn leading to lower inflation.

“This lower inflation benefit could be felt for an extended period of time after the petrol price cuts fade,” he said. “This is because petrol is an important cost to many businesses, so lower petrol prices will likely translate into lower inflation for other goods as well.”

The Reserve Bank will have more room to leave interest rates – currently at 5.75% – unchanged.

“At this stage, we think the Reserve Bank will only hike rates again in the second half of 2015 once inflation starts to pick up,” said Smith.

“In the absence of the oil price decline, it is likely the Reserve Bank would have had to hike rates earlier.”

 

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