THE DROP in fuel prices comes at a critical time as farmers start stocking up on diesel ahead of the harvesting period, says Paul Makube, the senior agricultural economist at FNB Agribusiness. Reuters

CRA Global Trends Explored SA

By Helm Preuss

The collapse in the price of oil should help the South African economy, as it will reduce fuel costs and so lead to lower prices of goods and services where transport is a significant factor.

Oil markets fell the most since 1991, when the first Gulf War ended, after the disintegration of the Opec+ alliance on Friday looked set to trigger an all-out price war.

Crude oil futures dropped almost 30 percent after Saudi Arabia slashed official prices on Saturday by the most in at least 20 years, and said they would maximise their output. US oil prices were last trading at $27.59 a barrel, while the global benchmark Brent crude was at $31.66 a barrel.

When the Monetary Policy Committee (MPC) cut the repo rate by 25 basis points at its meeting in January, the South African Reserve Bank assumed that the Brent oil price would average $66.50 (R1064) per barrel this year.

At a price less than half this assumption, there will be intense pressure on the MPC to cut the repo rate further when it meets next week.

Several central banks have cut their policy rates in response to the expected slowdown caused by the coronavirus.

Paul Makube, the senior agricultural economist at FNB Agribusiness, said last week that the latest drop in the fuel prices would provide relief for farmers.

“The cumulative decrease in petrol and diesel so far this year will help limit the impact of the expected fuel levy increase of 25cents per litre by April. This will likely contribute to positive cash flow, lower cost of production and improved profitability, as petrol and diesel make up a significant amount of farm input costs.

“The drop comes at a critical time as farmers start stocking up on diesel ahead of the harvesting period. Moreover, farmers are increasingly using petrol and diesel for backup generators in light of the current power supply challenges,” he said.

“Given that 70 percent of South Africa’s food is transported by road, the decrease in the petrol and diesel price is likely to have a positive impact on food inflation, easing pressure on consumers who are already struggling to make ends meet. This may possibly lead to further interest rate cuts later on in the year, given the improved inflation expectations,” he said.

Credit to IOL.