Oil markets experienced considerable volatility on Tuesday, 24 June, after reports emerged regarding a ceasefire agreement between Israel and Iran. However, analysts have cautioned that the overall risks in the region have not yet diminished, as tensions remain elevated.
Key Takeaways
- Ceasefire Brings Temporary Oil Price Relief: Oil markets saw a sharp pullback below 70 US dollars per barrel following reports of a ceasefire between Israel and Iran, easing pressure on South African fuel prices. However, the fragile nature of the ceasefire means risks of a renewed price surge remain.
- Global Surplus Helps Contain Oil Prices: The current global oil surplus and diversified energy markets are helping to stabilise prices, with supply routes from the Middle East still unaffected. This has prevented a repeat of the severe price shocks seen during the early stages of the Russia-Ukraine conflict.
- Higher Oil Prices Still Threaten Inflation: Any resurgence in hostilities could quickly reverse gains, with economists warning that rising fuel costs would fuel inflation and further strain South African household budgets, which are already under pressure from rising living costs.
About Arcadia Finance
Apply for a loan quickly and easily through Arcadia Finance. With no application fees and access to 19 reliable, NCR-compliant lenders, you get peace of mind and a simple process designed to meet your personal financial needs.
US Announcement Fails to Stabilise Situation on the Ground
US President Donald Trump stated on Tuesday that a ceasefire had been agreed upon between the two nations, yet military operations from both sides persisted. This ongoing activity has served to highlight the fragile nature of the current ceasefire arrangement. Military observers also pointed out that retaliatory strikes from both parties were continuing through the night, raising concerns that the truce could collapse within days.
In spite of lingering doubts regarding the durability of the ceasefire, oil prices dropped sharply from recent highs of over 80 US dollars per barrel to below 70 US dollars per barrel during Tuesday’s trading session. If this reversal in pricing is sustained, it could reduce the impact of an anticipated increase in petrol and diesel prices in South Africa in July. The expected price hike had been building towards an estimated 50 cents per litre earlier in the week. For South African motorists already grappling with household budget pressures, this potential easing of fuel prices could provide temporary financial relief.
Impact on South African Fuel Prices
As oil prices move lower, the rate of under-recovery in South African fuel pricing should begin to improve. However, it remains uncertain whether this improvement will be sufficient to shift the market towards an over-recovery scenario. The situation remains fluid and subject to change, depending on further developments in the conflict. Local economists have warned that exchange rate volatility could also play a role in shaping the final impact on pump prices next month.
Unfortunately, there remains the possibility that oil prices could once again escalate should hostilities resume in earnest, particularly if Israel and Iran act contrary to US diplomatic efforts and continue military engagements. Market watchers noted that the slightest escalation in the region, such as a naval skirmish or airstrike on infrastructure, could send prices spiking beyond current forecasts.
How Geopolitical Conflict Affects Energy Prices
Economists from Schroders have pointed out that global conflicts frequently influence broader economic performance, particularly through their effects on inflation. As energy costs are a critical driver of inflationary pressure, the oil price tends to come under intense scrutiny during such geopolitical crises.
The current standoff is being closely monitored by major economies, as any prolonged disruption could trigger fresh waves of inflation at a time when global markets are already navigating fragile post-pandemic recoveries.
It is fortunate that the global oil market currently enjoys a healthy surplus, which has played a vital role in keeping prices relatively contained despite the turbulence in the Middle East. According to Schroders, oil supply flows from the affected region have not yet experienced significant disruption in the wake of recent events. Sources within the shipping industry confirmed that major tanker routes in the Persian Gulf remain operational, although insurers are charging higher premiums.
In addition, the protracted instability in the Middle East has already been factored into market expectations. As a result, the present oil price of around 70 US dollars per barrel includes an estimated 20 percent risk premium, which accounts for the likelihood of future supply disruptions. With no immediate threat to oil supply and this premium already priced in, markets have so far remained relatively stable.
Comparisons with Previous Oil Price Shocks
The current situation is also markedly different from earlier oil price surges, such as those witnessed at the start of the Russia-Ukraine conflict. Some analysts had speculated that prices might surge to as high as 130 US dollars per barrel, but the conditions today are not directly comparable.
Izak Odendaal, an investment strategist at Old Mutual Wealth, noted that the present conflict is unlikely to drive oil prices to the extremes seen in 2022. The global economy today is less reliant on oil than it was in previous decades, meaning that even significant price increases may not inflict the same level of economic harm. A broader mix of energy sources, combined with efficiency gains, has helped insulate many economies from oil price shocks to some extent.
During the initial stages of Russia’s invasion of Ukraine, the Russian government actively used its oil and gas supplies as economic leverage, particularly against Europe, at a time when the world was still recovering from the effects of the Covid-19 pandemic. This contributed to extreme volatility in both energy and grain markets, fuelling inflation worldwide. In contrast, the current conflict is occurring against a backdrop of more diversified energy markets and less acute global supply shortages.
Iran’s Limited Influence on Global Oil Supply
In contrast, Iran currently lacks the capacity to weaponise its oil production to the same extent, as its output represents only about 2 percent of the global total. Furthermore, the country does not enjoy broad support from other OPEC members in this context. Even if Iran attempted to withhold its production, analysts believe alternative suppliers could rapidly fill the gap, limiting the global impact.
Future movements in oil prices will not depend solely on Iran’s actions. The responses of other major producers, particularly the OPEC cartel, will also be crucial. OPEC nations such as Saudi Arabia and the United Arab Emirates are unlikely to back Iran’s position and possess substantial spare production capacity that could be used to influence market stability. OPEC’s ability to quickly ramp up production has served as a key moderating force in past supply shocks, and it remains so today.
Efforts to restrict supply would risk conceding market share to competitors, while higher prices could dampen global demand at a time when economic pressures such as the US tariff war are already weighing on global growth prospects. For OPEC members, this is an outcome they are likely to avoid. Maintaining balance in the oil markets is seen as crucial to OPEC’s long-term strategy of retaining influence and market share.
Effects of Higher Oil Prices on Consumers
Despite the current level of relative market stability, any significant increase in oil prices would still have negative consequences. Rising petrol costs would drive inflation higher and place additional financial pressure on consumers. This is not an issue that can be easily ignored, as elevated fuel prices have a tangible impact on everyday living expenses. Consumer advocacy groups in South Africa have already raised concerns that another fuel price surge could erode household disposable incomes at a time when many families are struggling to cope with high food prices.
Higher fuel costs can lead to ongoing inflationary pressures if businesses pass these expenses on to consumers through price increases. Alternatively, they can reduce household purchasing power, effectively making consumers poorer. In this way, the global oil price operates much like a universal tax: the higher it climbs, and the longer it stays elevated, the less disposable income remains for both businesses and consumers to spend on other goods and services. Economists caution that a prolonged period of high oil prices could derail fragile economic recoveries in multiple regions, South Africa included.
Conclusion
Although the recent dip in oil prices offers potential short-term relief for South African motorists, the situation remains precarious. The ceasefire between Israel and Iran is tenuous, and any renewed conflict could push prices back up. While the global oil surplus has helped contain market volatility, rising fuel prices remain a key risk for inflation and consumer spending. South Africans should prepare for possible fluctuations at the pump in the coming weeks.
Fast, uncomplicated, and trustworthy loan comparisons
At Arcadia Finance, you can compare loan offers from multiple lenders with no obligation and free of charge. Get a clear overview of your options and choose the best deal for you.
Fill out our form today to easily compare interest rates from 19 banks and find the right loan for you.
