No hand brake for fuel prices

The IMF says futures prices point to an oil price of US$65.70 per barrel in 2021—59% higher than the 2020 average.

20 October 2021 | Economics

Given current data, the estimated upper bound for annual inflation in Namibia in 2022 is 4.7% year-on-year. – IJG Securities

Jo-Maré Duddy - Fuel prices, which have soared recently, are likely to remain high in the coming months but begin to retreat early next year.

While energy prices "will be elevated" for the next couple of months, "we expect that to come back down by the end of the first quarter next year and into the second quarter," the chief economist of the International Monetary Fund, Gita Gopinath, told AFP.

The outright price of Brent crude has surged more than 60% this year and hit US$85 for the first time since 2018 on Friday.

Currently petrol at Walvis Bay costs N$14.45 per litre – N$2.80/l or 24% more expensive than a year ago. Diesel at the coast sells for N$14.18/l – an increase of N$2.60/l or nearly 23% from October 2020.

Fuel prices in Namibia have already been hiked six times this year and petrol prices currently are at all-time highs. More expensive petrol and diesel have also been fuelling the price monster in the country.

Overall transport inflation in September printed at 7.5%, according to the Namibia Statistics Agency (NSA). In September 2020 it was 1.3%. Inflation for the operation of personal transport equipment, which includes the fuel price, came in at 11.6% compared to -3.5% a year ago.

According to IJG Securities, transport - the third largest basket item by weighting - was the largest contributor to overall annual inflation in September, contributing 1.0 percentage point to the total 3.5% annual inflation rate. In September 2020, overall year-on-year (y/y) inflation in Namibia was 2.4%.

INFLATION

Cirrus Capital says more expensive fuel will contribute to higher inflation looking forward.

“Fuel prices also have the second-round impact of higher costs for many goods and services, given that fuel is a large input for many and will also result in higher logistics costs. However, these second-round effects typically have a lag of several months. This may offset benefits from slower food price inflation should there be good harvests in the region (in light of the favourable rain forecasts),” the analysts comment.

IJG warns that elevated global shipping costs and the ongoing shortage of microchips and semiconductors pose a threat to production in a variety of industries.

“IJG’s inflation currently predicts that annual inflation will rise to 3.6% y/y in November and 3.8% y/y in December 2021. Average annual inflation for 2022 is forecast at 3.6% y/y. Given current data, the estimated upper bound for annual inflation in Namibia in 2022 is 4.7% y/y. The current uncertainty in the global economy makes this is a highly tentative prediction,” according to the analysts.

The IMF recently released its World Economic Outlook, in which its forecasts an overall inflation rate of 4.0% for Namibia in 2021, the highest since 2018 when the rate was 4.3%.

The IMF’s forecast for Namibia is considerable lower than the average of 10.7% it projects for Sub-Saharan Africa. For both 2022 and 2026, the IMF currently expects inflation in Namibia to average 4.5%.

MARKET TIGHTNESS

In its World Economic Outlook, the IMF says futures prices point to a downward sloping curve, or backwardation, with oil prices at US$65.70 per barrel in 2021—59% higher than the 2020 average— falling to US$56.30 in 2026.

“Market tightness is expected to continue—in line with the International Energy Agency’s (IEA) oil demand recovery projections,” the IMF says.

One of the main factors underpinning prices has been the reluctance of the Organisation of the Petroleum Exporting Countries and allies, known as OPEC+, to ease supply cuts, made during the worst of the pandemic, more rapidly.

The IEA recently said a global energy crunch is expected to boost oil demand by 500 000 barrels per day (bpd) and could stoke inflation and slow the world's recovery from the Covid-19 pandemic.

As a result, global oil demand next year is now projected to recover to pre-pandemic levels, the Paris-based agency said.

It made upward revisions to its demand forecasts for this year by 170 000 bpd, or a total addition of 5.5 million for the year, and by 210 000 bpd in 2022, or a total addition of 3.3 million.

OPEC+

An upsurge in demand in the past quarter led to the biggest draw on oil products stocks in eight years, the IEA said, while storage levels in Organisation for Economic Co-operation and Development (OECD) countries were at their lowest since early 2015.

Meanwhile, the IEA estimated that producer group OPEC+ is set to pump 700 000 bpd below the estimated demand for its crude in the fourth quarter of this year, meaning demand will outpace supply at least until the end of 2021.

Spare production capacity from the group is set to shrink rapidly, it warned, from 9 million bpd in the first quarter of this year to only 4 million bpd in the second quarter of 2022.

That output capacity is concentrated in a small handful of Middle East states, it said, and its decline underscores the need to increase investment to meet future demand. – Own report/Nampa/AFP/Reuters

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