Today's Talking Point Oil Update Analysis: The oil markets are down this morning with the prosp
Today’s Talking Point
Oil Update
Analysis: The oil markets are down this morning with the prospect of faster Fed policy normalisation and news that an Iran deal may be announced soon, pressuring the commodity. The front-month Brent contract touched a low of $92.15 this morning before paring some of the losses to currently trade around $94.15. Iran’s top negotiator tweeted yesterday that a deal is closer than ever, while Tehran has continued to make provisions for its return to the oil markets by meeting with key Asian buyers. If a deal is reached soon, Iran could end up pumping around 900k to 1mn barrels a day by December, as well as unleash the stockpiles that it has built up over the last four years. This will help to ease some of the significant tightness we have in the market at the moment. Given this news, it is no surprise to see that time spreads have narrowed a bit, with the prompt spread for Brent declining to around $2.26 per barrel from $2.57 per barrel yesterday. This suggests that the upside for oil will be a bit more contained for now, unless we get any negative developments on the Russia-Ukraine front, which could bake in an even greater risk premium into the market than we currently have.
Rand Update
Two more risk events were cleared off the decks yesterday, leaving investors to focus on next week’s budget. Overnight, the FOMC minutes delivered no new surprises and reiterated that the Fed was ready to hike rates and reduce the size of its balance sheet later this year. The important point here was that the rate hikes would take place at a measured pace, pouring cold water on recent talk of a 50bp hike in Mar in line with St Louis Fed President Bullard’s comments.
On the domestic inflation front, consumer prices moderated in January, coming in at 5.7% y/y from 5.9% y/y in December. According to Stats SA, inflation moderated for the first time in three months due to lower prices for food and non-alcoholic beverages, housing and utilities, transportation, and other goods and services. However, quickening core inflation will continue to be a source of concern for policymakers, having risen from 3.4% y/y in December to 3.5% y/y in January. The market reaction was modest, with the USD-ZAR hovering just above the 15.00-handle. While inflation will remain contained on the back of relatively tight monetary dynamics, there is a possibility that inflation breaches 6% in Q1, given expectations for food and energy prices to remain elevated. Note that this will partly be determined by the ZAR’s performance in the coming weeks.
The ZAR’s recovery may surprise many people but is in line with the country’s underlying fundamentals relative to other countries in the world. While many concerns are doing the rounds in SA, other countries face their own challenges. Furthermore, SA as a commodity producer enjoys some support and tailwinds that most other currencies do not and for as long as commodity prices remain elevated, and risk appetite improves, the ZAR will enjoy improved performance.
Bond Update
In line with the SARB narrative, inflation moderated in January, with headline CPI growth dipping to 5.7% y/y from 5.9% y/y in December. Inflation was lower for the first time in three months due to decelerating growth in prices for food and non-alcoholic beverages, housing and utilities, transportation, and other goods and services.
Note, however, that the “non-durable goods” inflation pressure remains acute in non-discretionary items with inflation topping 9.50% y/y in January, albeit lower than the 10.5% y/y recorded in December. Semi-durable and durable goods prices were far more stable around 2-4% inflation, underscoring how weaker demand is forcing margin squeeze to keep volumes in the larger ticket items low.
It was notable that the inflation rate of fuel in all urban areas has cooled quite substantially to 32% y/y from 40% y/y in December, as a sign that the “base effects” of rising oil prices that rose over 90% between November 2020 and March 2021 (in ZAR terms) have statistically reduced inflation in early 2022. Transport inflation should continue to cool on the back of this, and has already decelerated to 14% y/y from around 16% y/y the prior month.
This could well remain the case for the next few months as various indicators suggest that the bull run in oil prices could dissipate. If the ZAR price of oil were simply to hold around these levels, the year-on-year rate of inflation in the ZAR price of oil will have halved by July, from 60% y/y at present to around 30%. This will reduce the overall impact on the inflation rate from around 1.3 percentage points to 0.7 percentage points.
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