Why low fuel prices positive for local markets

DROP in fuel prices matters a lot to the movement of prices of goods and services and may change the market patterns, analysts said on Wednesday.

The pump fuel prices continued to go down for two consecutive months, thanks to the government’s monthly subsidy injected to cushion the negative impact of the prices that were heading to the ceiling.

Analysts argue that the low fuel prices, also, may change the markets behaviour, thus, portfolio investors are waiting for the headline inflation report, to gauge the impact of the drop in pump prices to determine the next move.

The inflation rate increased by one percentage point, to clock 4.6 per cent in August, the highest in five years. The September inflation data are expected to be released next Monday.

Alpha Capital Head of Research and Financial Analytics Imani Muhingo said the markets await the September inflation data to gauge if the slight drop in the price of fuel has any positive impact to ease the changing prices for goods and services.

“A drop in fuel prices should most likely have a positive impact on headline inflation because the price of fuel affects the cost of transportation, which subsequently affects almost every other economic activity,” Mr Muhingo told the ‘Daily News’ yesterday.

Ease in fuel prices not only relaxes the pricing of goods and services but also improves gross margins in corporate earnings.

“Ease in fuel prices also releases some pressure from the shilling, since about 30 per cent of our import bill is fuel.

“Therefore, this relaxes the fears of looming inflationary pressures, and lowers the possibility of adopting a contractionary policy by monetary authorities,” Mr Muhingo, who is an economist, said.

He went on to say that lowered fuel prices reduce transportation costs, which significantly impacts on the lives of the people.

The prices of fuel dropped for two consecutive months to a five-month low at 2,886/- and 3,083/- a litre for petrol and diesel respectively in Dar es Salaam yesterday. The price of petrol went down by 83/- while for diesel by 42/-.

 In Tanga, petrol price dropped by 109/- to 2,924/-, while diesel was sliced by 23/- to 3,108/-. In Mtwara, petrol price dropped by 174/- to 2,908/- and diesel by 114/- to 3,099/-. Dar, Tanga and Mtwara are sea ports, where fuel consignments are discharged at and distributed in various regions as well as in neighbouring countries.

 Energy and Water Utilities Regulatory Authority (EWURA), the price decrease was also boosted largely by the government issuance of 59.58bn/-subsidy for this month.

 EWURA said in a statement released late on Tuesday that the world oil prices (FOB) for August that have been used for computation of local fuel prices in October decreased by 7.4 per cent, 3.9 per cent and 1.9 per cent for petrol, diesel and kerosene, respectively, compared with the same prices for July.

 However, EWURA said, the impact of such decreases has been outweighed by an increase in premiums in the local market by between 50 per cent and 163 per cent, depending on the port and product compared to the premiums used in the September pricing.

 Another economist Dr Hildebrand Shayo told the ‘Daily News’ that variations in global prices can indeed have major temporary effects on the country’s domestic prices as energy prices are one of the major determinants of the short-term fluctuations of most nations’ headline inflation.

 More importantly, Dr Shayo said, trade with low-cost countries has increased massively in the last two decades, which has logically resulted in a reduction in the price of imported goods.

Assistant Lecturer – Finance—University of Dar es Salaam Business School Mr Godsaviour Christopher said the new price cap for October with a slight decline compared to the previous month, is expected to impact several economic activities, mainly transportation activities, positively.

“In the short run, it is challenging for the prices of goods and services to adjust due to a short-term decline in oil prices, as most of the costs depending on oil prices are fixed in the short run. However, those in the transportation sector, such as “bodaboda”, will enjoy a slight decline in the cost of providing services, leading to an increase in profit margin.

However, he sounded a warning that the prices could reverse to a sharp increase within the near future.

He said the oil producers group (OPEC plus) met yesterday to discuss a possible production cut due to a decline in prices by 25 per cent since June. They are expected to cut oil production by more than 1 million barrels per day. This move will create a supply shortage, pushing oil prices high. 

“It is good to consider that the OPEC+ cartel will impact global oil prices, given the conflict between Russia and Ukraine and the Nord Stream scandal. This will soon lead to an increase in oil prices in the future. 

In East African bloc, Tanzania has the lowest pump fuel prices, while Uganda has the highest at 4,006/- as of yesterday, followed by Kenya 2,933/-, DR Congo 3,067/- and Rwanda at 3,522/-, then Burundi 3,692/- per litre.

 

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