Could Rising Fuel Prices Affect Your Investments?

Fuel prices in South Africa again increased for diesel inland, between 88c / l and 94c / l for diesel on the coast, while the price of gasoline fell by 12 cents per liter on May 4, 2022.

The latest announcement on the fuel price is based on the shortage of diesel supply due to lower exports from Russia as the main exporter of distillate fuel.

Nonetheless, an intervention by the National Treasury to reduce the cost of fuel by cutting the general fuel tax (GFL) by more than R1 per liter. While this would have brought relief, the government can do little beyond cutting the GFL.

The price of South African fuel is mainly determined by 1) international oil prices and 2) the rand-dollar exchange rate.

The recent strength of the rand against the dollar has further impeded price increases. Geopolitical tensions and looming oil sanctions against Russia have led to expectations of a decrease in future oil supply and consequently the price of Brent Crude Oil has risen.

The correlation between Brent Crude and the price of South African fuel can be seen in the graph below:

The price of futures on the Brent Crude rand against the price of South African gasoline

Image: Moneyweb

How fuel prices are calculated

The price of fuel in South Africa is made up of four main elements:

  • Base price of fuel: The base fuel price represents approximately 42% of the total fuel price. The base price of fuel consists of the purchase price of the fuel (in US dollars), as well as the costs of transportation, insurance, storage and financing. In South Africa, the price of fuel is adjusted on the first Wednesday of each month and is determined by two main factors: the rand / US dollar exchange rate (how fuel is purchased) and international oil prices (how much fuel costs per month). ‘purchase) .
  • Wholesale and retail margins, as well as distribution and transportation costs: The final contributors to the gross price of gasoline are the costs associated with transportation and storage, customs and excise taxes, and retail margins for gas station owners and account for approximately 22% of the total fuel price.
  • The GFL: The general fuel tax, which represents approximately 23% of the total fuel price. The GFL goes to the National Treasury. The government is free to use this tax as it sees fit.
  • RAF tax: The road accident fund tax makes up about 13% of the fuel price. These funds can only be used for road accident compensation claims.

The impact of rising fuel prices on consumers

Higher fuel prices have a ripple effect on South African consumers:

  • Motor Vehicle Ownership Costs: Vehicle owners will feel the impact immediately and pay more to fill up.
  • Transportation Costs: Rising fuel prices mean higher costs for companies to run bus and taxi services. These costs are passed on to the consumer.
  • Consumer goods: an increase in the price of fuel affects the cost of consumables with an increase in logistics costs. An increase in logistics costs are typically passed on to the consumer, with a basket of goods costing the South African more money as a result.

The impact of higher fuel prices on your investments

Rising fuel prices lead to higher inflation and can lead to higher interest rates. Higher interest rates will negatively impact bonds, and although cash rates will rise, they may not be enough to offset the impact of higher inflation.

Higher interest rates are generally negative for stocks due to the way they are valued. But higher interest rates and higher inflation are particularly bad for consumer actions for the reasons mentioned above. There are some notable exceptions in the equity sector, such as banks which tend to do well in higher interest rate environments.

Rising oil prices will also benefit companies exposed to these prices, such as Sasol, or even companies with exposure to fuel retail such as Kaap Agri.

Another option could be to invest in exchange-traded funds or exchange-traded securities.

International options are also available with many attractive companies in which to invest in the energy supply chain. One company we particularly like today is Schlumberger, which provides technology and services to the energy industry for characterization, drilling, production and processing of reservoirs.

Looking at replacement technologies is also an interesting option. Here we like Enphase Energy, a US-based energy technology company that develops and sells software-based home energy solutions.

Equity exposure remains the best solution for investors against inflation on a relative basis; but, as explained, this will vary greatly by sector and also by stock level.

This article first appeared on Moneyweb and has been republished with permission. Read the original article here.