Oil uptick's slippery slope

James Monteiro | Wed, 26 Aug 2009 16:59
[miningmx.com] -- While an increase in the oil price may be good news for the R194bn petrochemical group Sasol, it could heap pressure on South Africa's inflation targets, analysts said.

"We suspect that oil prices will be near to $100 per barrel in the second half of 2009," said Standard Bank in a July research report.

These comments come against a trading statement issued by Sasol on Wednesday, in which it said the higher oil price would mean year-end share earnings would not be as badly hit as expected.

However, South Africa's inflation rate would increase on the back of a higher oil price leading to a reduced amount of investment expenditure and, in turn, subdued consumption, said Standard Bank.

"At such levels, concerns over higher inflation and lower growth (stagflation) will probably prove sufficient to foster a sharp downward oil price correction," said Standard Bank. The South African Reserve Bank (Sarb) has in the last 29 months struggled to meet its self-imposed 3% to 6% inflation target.

On Wednesday, Sarb said the consumer price index (CPI) was at 6.7% in July, better than the 6.9% recorded in June. The CPI is the weighted basket of goods and services bought by the average household.

An oil price approaching $100 per barrel would "compound inflationary pressures" further, said an analyst who chose to remain anonymous.

Analysts said the world economy would "not be able to handle" an oil price above $80 to $85 per barrel for 2009.

Share earnings clawback

On August 28 2008 oil reached a year high of $115.09, having dropped to a low of $36.49 per barrel on December 24 in the same year. Currently a barrel of oil costs $72.17.

The gradual uptick in oil as of the beginning of 2009 has benefited firms like Sasol.

On Wednesday, a trading update issued by Sasol showed that the higher oil price had cushioned expectations of lower share earnings. Share earnings would be up to 42% lower, rather than the 50% indicated by Sasol in June.

The firm attributed this to the strengthening of the Brent crude oil price and product prices during June 2009, among others, as a reason for its clawback.

Sasol stocks have weakened 28% in the last 12 months after peaking at R424.95 on August 29 last year. Stock in the company is currently trading down 2.12% to R298.53 per share.

However, analysts were hopeful Sasol had turned the corner and expected it not to cut its dividend. Sasol cut its interim dividend by a third year-on-year in March, and suggested paying future dividends out in shares.

"Sasol has a good track record for paying out," said Kurt Benn, a portfolio manager at Cadiz African Harvest. "At the moment Sasol has a strong balance sheet, so it would be disappointing to see them cut it," he said.

Broker consensus currently has Sasol on a buy, according to data supplier McGregor BFA. "Buyers look past Sasol's numbers and more towards the uptick in the oil price," said an analyst who declined to be quoted.

Sasol is due to release its year-end results on September 14.