Falling oil price to take sting out of inflation

Falling oil price to take sting out of inflation

FMCG SUPPLIER NEWS

BusinessDay - May 31st 2012, 09:36

International oil prices yesterday fell to their lowest level in about five months, as fear continued to grow over the threat of Europe’s deepening debt crisis to global growth and reports that the US has more oil in reserve since its record 1990 levels. 

Falling oil prices will ease SA’s inflation outlook, which cooled in recent weeks after commodity prices reversed gains made earlier in the year as hope faded that the global economy would recover.

Tomorrow the Department of Energy will announce new fuel prices, with economists factoring in a cut of more than 50c/l in petrol prices, and more than 20c/l for diesel. Prices were last cut at the start of the year.

"There’s no supply threat in oil, which provides relief to global inflation," Ian Cruickshanks, head of treasury at Nedbank Capital, said yesterday.

"The decline will serve as a cap on global inflation."

The bulk of transport — goods and people — is by road in SA, so a cut in fuel prices has an immediate effect on disposable income and inflation levels. High fuel and food prices have stoked inflation since last year.

Brent oil dropped below $104 a barrel yesterday and crude oil in New York tumbled to the lowest level since October.

Analysts expect a report from the US energy department today to show US supplies rose by a million barrels to 383,5-million last week — the highest in 22 years.

An oversupply in the US and weak growth prospects in Europe have pushed oil and other commodities lower over the past month, with oil prices plunging 13%.

Mr Cruickshanks sees oil trading between $100-$115 a barrel, with risks to the downside.

The decline in oil and other commodity prices further eases pressure on Reserve Bank governor Gill Marcus to consider hiking interest rates in the last quarter of the year.

Economists have debated whether emerging-market countries — whose inflation outlooks have improved — may consider rate cuts to boost economies slowing due to Europe’s contraction. Europe’s slump is showing signs of deepening as Spain struggles to finance its banks amid a recession and unemployment above 20%.

Ms Marcus said at the Gordon Institute of Business Science last night even in normal times, central banks functioned in an uncertain environment. "In the prevailing difficult global conditions uncertainty is at an even higher level and many of the actions taken have no precedence."

She warned that the measures required to deal with the crisis, for which there was no end in sight, may have unintended consequences for central bank s.

Concern over food inflation has also eased in recent weeks on expectation that the US, the world’s largest grower of maize, would produce a bumper crop this year, compared with last year’s disappointing harvest.

A possible limiting factor on just how much SA could benefit from weaker oil prices is the rand, which has weakened by more than 14% against the dollar in early March. The rand fell as much as 2,6% against the dollar yesterday and, at R8,50/$1 in late afternoon trade, was at its weakest level since the last week of November.

Of the 18 emerging-market currencies tracked against the dollar, the rand was the worst performer yesterday.

Absa Capital said in a note yesterday that lower commodity prices and broad-based dollar strength were also not helping the rand’s cause.

While manufacturers receive short-term benefits from the weaker currency because of price competitiveness, sustained rand weakness in the medium to long term eats into the industry’s purchasing power.

For miners a weak rand means the cost of imported equipment rises, adding pressure to mining inflation, already at 10%-15%.