The oil price is set to have a direct effect on all our pockets.
The oil price is set to have a direct effect on all our pockets. Near record period lows of 27.88 USD per barrel experienced in January that helped boost household affordability and stave off worsening inflation concerns, have now started to show strong gains – an 18.4% increase in price in the past three weeks according to figures on Nasdaq.
Low oil prices experienced during 2015 could now be moving into an upward trend. How these pricing shifts play out in 2016 will have a marked effect on the affordability and status of the South African economy.
The Consumer Price Index (CPI) stands at 6.2% and the more telling Producer Price Index (PPI) sits at 7.6%. A prolonged period of low oil prices has helped South Africa resist heavy inflationary pressure on a market grappling with poor affordability and reduced economic output.
Volatility in the oil market could catastrophically weaken the South African market’s ability to avoid a recession as inflationary pressure on the local economy increases.
The latest Short Term Energy Outlook report from the US Energy Information Administration (EIA) states that, “Global oil inventories are forecast to increase by an annual average of 1.6 million barrels per day (b/d) in 2016 and by an additional 0.6 million b/d in 2017.
"These inventory builds are larger than previously expected, delaying the rebalancing of the oil market and contributing to lower forecast oil prices.”
The oversupply of oil to the global market coupled with a reduced demand on the back of cooling economies should manage to help curtail oil price recovery in the near future.
Despite moves by OPEC and other producers to curtail output, it appears according to the EIA that “production is more resilient to lower prices than previously expected”.
With political turmoil and poor global market and commodity outlooks continuing to weaken the Rand back towards a high of 16.22 USD/ZAR on Wednesday, South Africa’s ability to resists price volatility in the oil market is further eroded.
Any further stimuli to inflation in the South African economy is expected to bring with it rounds of repo rate adjustments as the South African Reserve Bank looks to combat a rising inflation rate in the country.
The accompanying effects of a rate increase are further restrictions on household income as interest-based debt becomes more expensive.
While the Rand continues to be a weakened currency in global markets, the South African household should expect a prolonged period of belt tightening.
* Ryan Hancocks is the Director of the South African Reserve Bank Centre for Economics Journalism at Rhodes University
