Bianca Botes, Managing Director at Citadel Global
The United States (US) war with Iran has spiked oil prices and injected a lot of uncertainty in the markets. One of the biggest impacts for consumers is the increased cost of fuel and the knock-on effect on the broader economy. However, to understand what is happening when it comes to the increased cost of fuel, we need to understand what drives pricing along the fuel value chain.
The number that appears on a fuel price board is the end of a long sequence of factors. It is not a live reading of the market. Understanding the difference between what oil costs on paper and what it costs to actually put a barrel on a ship, route it to South Africa (SA) and get it into a refinery is the difference between reading a headline and understanding the process. Right now, the market price of oil and petrol price are further apart than they have been in some time.
The Brent crude benchmark
The start of the petrol value chain is Brent crude, which is a worldwide benchmark price for purchasing oil. It is the price the market agrees on for a standardised, forward-dated contract based on North Sea oil. The price is denominated in barrels which is a measure of 159 litres (42 US gallons or 35 imperial gallons) of oil. What physical cargoes actually trade at – the real volumes changing hands between producers, traders and refiners – is a different price to the Brent price. In stable conditions, the gap between benchmark and physical price is small and predictable. When supply routes are disrupted, however, the physical market moves faster and further away from the benchmark because buyers who need actual oil now are bidding against each other for cargoes that tangibly exist and can be moved. The benchmark does catch up, but with a lag. This means that when you watch the Brent price on a screen during a supply disruption, you are watching yesterday’s agreed price. In actual fact, the traders selling physical barrels of crude are already paying more – and so is SA.
SA’S dependence on Gulf fuel
SA does not produce meaningful quantities of crude oil domestically and domestic refining capacity has contracted materially over the past several years. As such, the country has become progressively more dependent on imported refined products rather than crude processed locally. Almost 80% of those imports come through Durban, where Island View Terminal serves as the primary unloading point for the country’s fuel supply. Before the Hormuz disruption, the bulk of SA’s diesel, petrol and jet fuel arrived from Gulf producers – Oman, Saudi Arabia and the United Arab Emirates being the primary sources. That supply line is now under pressure and the market has had to adapt in real time.
SA’S new oil supplier
The adaptation is visible in the shipping data. SA has been receiving significantly more fuel from the US in recent weeks, with American cargoes partially filling the gap left by constrained Gulf flows. This is not a like-for-like pricing substitution. US Gulf Coast refined products must travel considerably further to reach Durban than a cargo loading out of the Arabian Gulf under normal conditions, and distance translates directly into freight cost. That freight cost sits on top of a flat price that is itself elevated. The landed cost of a barrel of fuel in SA today reflects both the market price of the commodity and the substantially higher cost of getting it here from a different origin – a compounding effect that the regulated petrol price formula does not always capture cleanly or quickly. SA recorded its largest petrol price increase in close to two decades at the start of April and the repricing of freight and supply origin has not yet fully worked through the system.
Petrol vs diesel
This is where diesel becomes a separate and more immediate conversation. Petrol pricing in SA is regulated through the Basic Fuel Price mechanism – a government formula that controls what motorists pay at the pump. There is no variation between retailers. Diesel operates differently. It has a maximum retail price, but large commercial buyers, including transport companies, mining operations and agricultural businesses, transact directly with suppliers at negotiated rates. This means diesel pricing in SA is more exposed to physical market movements than petrol is. When cargo costs rise, when freight premiums expand, when alternative supply origins are more expensive to source and ship, diesel buyers feel that signal before it shows up on a forecourt board – meaning freight, food distribution and industrial input costs are already feeling the pinch, while the pump price still has to catch up.
Where the damage is done
What makes supply disruptions even more damaging is the downstream trading behaviour. When buyers believe supply is about to tighten, they order ahead of immediate need, with wholesalers building inventories and logistics operators filling storage. While each of these decisions is rational in isolation, collectively, they amplify the apparent tightness in the market and drive prices harder than the physical reality justifies. On the back of the war, the major oil trading houses are all guilty on this point. Even if the conflict concluded and a ceasefire took hold tomorrow; the rewiring of global oil trade flows would take months to normalise. Unfortunately, supply chains do not snap back and the market has been warned not to expect a quick return to pre-war patterns and that Hormuz flows may, in fact, not recover to their previous volumes regardless of how the political situation resolves.
Delayed pain for the consumer
The last part of the picture is the one that gets the least attention. Even if alternative supply were fully secured today, the effect on SA pumps would still take weeks to arrive. A tanker from the US Gulf Coast to Durban covers a substantially longer route than one from the Arabian Gulf – transit time alone runs to several weeks. Once a cargo arrives, it must be offloaded, processed through the terminal infrastructure and distributed through an inland logistics network before it reaches a vehicle. The supply chain between a barrel leaving a loading port and that same barrel entering a tank in Johannesburg is measured in weeks, not days. The market prices in what it expects future supply to look like, but consumers experience what supply looked like in the past. So, even if the oil price goes down, consumer pricing will linger higher – long after the disruption is over.
ENDS
