Fuel pump prices hike on the cards as OPEC gangs up to cut supply

Kenya faces a possible increase in its import bill after leading global oil producers agreed on their first deal to significantly cut oil production.

The deal has sent the price of Brent crude, the global benchmark for oil prices, to $57.89 (Sh5,911) per barrel in overnight trading between Sunday and Monday. This is the highest price in 17 months.

For the first time, Organisation of Petroleum Exporting Countries (Opec) has teamed up with 11 non-Opec members in a deal that could spoil the party for net importers of crude oil.

The prices may have finally bottomed out with signs of a barrel falling to below $50 (Sh5,050) becoming slim each day.

Oil importing countries like Kenya risk starting to pay more for oil, with oil marketers expected to pass on the extra cost to consumers.

While Opec members want to cut supply by 1.2 million barrels per day, non-Opec members have approved to cut their supply by 558,000 barrels every day.

Since touching a low of $27.88 on January 20, the price has been improving. The latest price is more than twice the cost of a barrel in January.

With the deal expected to be effected early next year, the oil producers are determined to clear the supply glut and heal their crumbled economies.

About a quarter of Kenya’s import bill is attributed to petroleum products. This exposes the country to shocks from global oil price fluctuations, especially with local consumption rising since 2010.

According to the latest data from Petroleum Institute of East Africa (PMIEA), while in 2010 Kenya consumed 4.05 billion litres of oil, last year, consumption hit 5.88 billion litres.This is a growth of 45 per cent.

WITHIN COMPETITIVE RANGE

According to the Kenya Economic Survey 2016, the country spent Sh226.1 billion on petroleum imports as oil prices started easing. This was substantially lower than Sh335.7 billion, which was the oil import bill for 2014 and Sh321.9 billion for 2011. In 2011, a barrel of oil was selling at an average of $111.26.

So far, in the six months to June, the country has consumed 2.98 billion litres. This translates to a 30 per cent increase compared to a similar period last year.

If the rally in oil prices continues, the import bill will rise, widening Kenya’s export to import deficit. This could also put the shilling under pressure since the government will now have to spend more to buy oil.

PIEA Chairman Powell Maimba told The Standard in a recent interview that he expects global prices to shoot up and put pressure on the import bill. He said since the Opec deal has happened at a time oil was already showing signs of recovery, the prospects of higher pump prices are high. For oil marketing companies, Mr Maimba said, the Open Tendering System (OTS) and the Energy Regulatory Commission role will ensure prices remain within competitive ranges without causing significant spikes.

“The number that tendering firms put on table is usually locked in with premium. So whether prices go up or down, to the oil company, it is immaterial since they take a hedge on the international market,” he said.

A day after Opec signed the deal, Energy Regulatory Commission Director General Joseph Ng’ang’a said he expected the impact to be felt in the next two to three months.

This is because of 30 to 45 days’ time lag between procurement and delivery.

In a phone interview with The Standard, Silha Rasugu, an energy analyst at Equity Investment Bank warned that resurgence of prices will unmask the under-performance of the exports and the entire economy.

“If the rally goes on, we will see a deficit in our balance of payments considering that the oil makes up a quarter of all our imports,” he said.