Impact Analysis: Rand-Oil Price Re-Enters Multi-Year Channel

Research Notes For 23 to 27 June > https://www.unum.capital/post/r2327june

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The chart of the Rand-Oil price (USDZAR multiplied by the Brent Crude oil price) shows a critical technical development. After breaking out of a multi-year channel in 2022—a very negative sign for the South African economy—the price has now fallen back inside this long-term range. This "failed breakout" is a powerful reversal signal and has significant positive implications, particularly for inflation and consumers.

The Technical Picture: A Failed Breakout

• The Channel: For over a decade, the Rand-Oil price traded within a predictable channel. The upper boundary of this channel acted as major resistance.

• The Breakout (2022-2024): The price breaking above this channel signaled a new, more expensive regime for fuel in South Africa, contributing significantly to inflationary pressures.

• The Reversal (Current): The recent price action shows a decisive failure to hold these breakout levels. The price has fallen back inside the channel, a pattern often called a "bull trap" (in this context, "bullish" for the Rand-Oil price, which is bearish for the economy). This technical failure suggests that the extreme upward pressure has likely peaked and that the price may now trend lower, back toward the middle or even the lower end of its historic range.

Positive Impacts: Widespread Relief

A lower Rand-Oil price is a major tailwind for the South African economy.

• For Consumers (The Biggest Winners):

  • Lower Petrol Prices: This is the most direct and immediate impact. A sustained lower Rand-Oil price translates directly to relief at the pump, increasing the disposable income of households.

  • Reduced Food Inflation: Fuel is a primary input cost for agriculture (planting, harvesting) and logistics (transporting goods to stores). Lower fuel costs help to ease food price inflation, providing further relief for consumers.

• For Inflation & Interest Rates:

  • Disinflationary Pressure: Fuel is a major component of the Consumer Price Index (CPI) basket. A lower fuel price is strongly disinflationary and helps to bring headline inflation down.

  • SARB Flexibility: This is the most important macroeconomic impact. Lower inflation gives the South African Reserve Bank (SARB) more room to maneuver. It eases the pressure to keep interest rates high and significantly increases the probability of future interest rate cuts.

• For Businesses:

  • Lower Input Costs: Nearly every business, from manufacturing and mining to retail and services, sees a reduction in operational costs from lower fuel and transport expenses.

  • Improved Margins: Reduced costs can lead to improved profitability for companies, especially those in transport-intensive sectors.

Negative & Nuanced Impacts

The benefits are not universal, and some areas are negatively affected.

• For Government Revenue: A significant portion of the petrol price is made up of taxes, primarily the General Fuel Levy. Lower oil prices can sometimes lead to lower overall fuel consumption or political pressure against raising fuel taxes, which can impact government revenue streams.

• For Energy Producers (e.g., Sasol): A lower oil price directly reduces the revenue and profitability of energy-producing companies. Sasol's share price, for example, is highly correlated with the Rand price of oil.

Conclusion: A Significant Economic Tailwind

The technical failure of the Rand-Oil price to sustain its breakout is arguably one of the most positive macroeconomic developments for South Africa. It signals a potential end to the period of extreme fuel-cost pressure that has squeezed consumers and businesses.

The primary benefit is its powerful disinflationary effect, which improves the outlook for interest rate cuts, stimulates consumer confidence, and reduces costs for businesses. While not beneficial for energy producers, the widespread relief it provides to the rest of the economy makes this a profoundly positive shift.

Lester Davids

Senior Investment Analyst: Unum Capital