Oil prices in the international market yesterday rose to a four-month high, with a barrel touching $70.74 (Sh7,144) in what is likely to upset Kenya’s external position.
A barrel of crude oil - about 159 litres - surged past the $70-mark for the first time since May 22, 2019 when the commodity was going at $70.99 (Sh7,162).
Kenya has in recent months reaped the dividend of low global oil prices, a situation that has seen its balance of payment improve considerably as at the close of 2019.
A drop in the global prices of commodities, especially oil, helped offset the loss in export earnings, propping up the shilling between July and September last year.
The value of imported oil dropped by 12 per cent during the period under review, giving motorists some reprieve during the festive season after a tough year.
The escalation in global oil prices comes against a build-up in tensions involving the United States, Iran and Iraq after President Donald Trump’s administration orchestrated the killing of a top Iranian general, according to the Reuters news agency.
Reuters quoted analysts from ING, a Dutch multinational banking and financial services corporation, saying now the big uncertainty for markets is how Iran will respond to the attack.
“While clearly the latest developments put US assets in the region at risk, it also increases the risk of disruptions to oil supply in the Middle East, be it through the Iranians disrupting Strait of Hormuz oil flows, or through attacking energy infrastructure of US allies in the region,” said ING.
If the supply of oil is disrupted, prices will rally, hitting oil importers such as Kenya hard.
Petroleum is a major determinant of the cost of living affecting transport, manufacturing, power and even agriculture sectors.
In December, motorists enjoyed some slight reprieve at the pump after prices of petroleum products declined. Petrol, diesel and kerosene declined by Sh1.09, Sh2.83 and Sh1.75 respectively in Nairobi from mid-December, according to the State-issued monthly pricing review.
An increase in global prices of oil would also mean the country needs more dollars to buy the critical input, a situation that is likely to put pressure on the shilling. With oil taking up more of the country’s reserve of foreign currencies, the shilling is likely to weaken.
Export earnings in the third quarter of 2019 dropped to Sh147.7 billion compared to Sh152.1 billion in the same period in 2018.
“The reduction could be attributed to 3.2 per cent decrease in total exports to Sh145.9 billion and 4.9 per cent decline in imports to Sh410.5 billion,” said the Kenya National Bureau of Statistics in a recent report.
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The value of imports during the period under review declined by 5.3 per cent to Sh147.5 billion compared to Sh152.1 billion in the same period in 2018.
However, with bad weather, imports of processed food and beverages more than doubled to Sh9.7 billion in the third quarter of 2019 compared to the same quarter in 2018.
This saw the share of food and beverages to the total imports increase by 2.6 percentage point in the review period.
As a result, Kenyans who had been grappling with a tough environment which saw the economy grow at 5.1 per cent in the third quarter, were spared further financial strain.
The economy expanded by six per cent in the third quarter of 2018. Kenya paid Sh67.7 billion for petroleum imports - a significant drop-down compared to Sh76.7 billion in the same period in 2018.
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