Jitters in East Africa as global oil prices rise to $85 a barrel

Monday October 8 2018

A fuel station in Nairobi.

A fuel station in Nairobi. There are fears that global prices of crude could rise to $100 per barrel before the end of the year. PHOTO | NMG 

By ALLAN OLINGO
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The global crude oil price has risen in the past week to a four-year high of $84.78 a barrel, sending jitters around the world about a further increase to above $100.

This price per barrel, recorded on Friday, is the highest since October 2014, driven by concerns over a possible reduction in global supply following the imposition of fresh US sanctions against Iran.

The sanctions, set to become effective on November 4, are expected to cut global supply by up to two million barrels a day.

President Donald Trump has asked the Organisation of Petroleum Exporting Countries to produce more oil to plug the anticipated deficit.

However, even a promise by Saudi Energy Minister Khalid Al-Falih that the kingdom is willing to tap all of its spare capacity of 1.3 million barrels a day, if necessary, does not seem to be reassuring the market.

In East Africa, a further increase in crude prices would worsen consumers’ plight as they pay more at the pump. Petrol is currently selling at $1.18 per litre in Kenya, Compared with $1.14 in Uganda, $1.01 in Tanzania and $1.28 in Rwanda.

Kenyan consumers will feel the pinch most, as a rise in oil prices would wipe out the relief President Uhuru Kenyatta pushed for last month after pump prices reached $1.28 in the wake of a 16 per cent tax on petroleum products. The president recommended a reduction of the VAT to eight per cent.

Regional consumers, who depend on Kenya for imports, will also experience a rise in the cost of doing business.

Kenyatta University economics lecturer Francis Omondi predicts that Brent crude oil prices will reach the $100 per barrel mark before the end of the year, which last happened in 2014, when the prices reaching $112.

“We are going into interesting times once the Iranian sanctions kick in,” he said.

In its latest review last month, the Energy Regulatory Commission lowered oil prices on the backdrop of a 1.6 per cent fall in the average cost of Brent crude oil to $75.05 per barrel in August from $76.3 in July.

This is now expected to rise marginally in the next review set for October 14, but the bigger impact will be felt in the November review, if oil price keeps up its momentum.

The World Bank has said that prices are likely to remain elevated the rest of the year and into 2019, affecting prices of basic goods in the region, which is import-reliant.

“Supply-side factors, including declining production in Venezuela and the reintroduction of sanctions on Iran have been the main drivers of the rise in oil prices, although demand has also remained robust. The tightness of oil supply means that prices are particularly susceptible to shocks, and implies that risks are firmly to the upside,” said World Bank economist Cesar Calderon.

Inflation
Oil prices and inflation have a positive correlation. Kenya’s September inflation rose to 5.7 per cent, from 4.04 per cent in August, the highest rate in 11 months, in the wake of the introduction of the VAT, and is expected to rise further.

“The cause-effect relationship is on two fronts: Directly through higher pump prices and production costs and indirectly through the effect of dollar pricing given petroleum imports account for nearly a quarter of the country’s import bill. This could see inflation rise to the upper band of the CBK target with the potential to overshoot the upper limit in the last quarter of the year,” said Commercial Bank of Africa economists in a note.

Razia Khan, head of research for Africa at Standard Chartered Bank, said that the VAT on fuel was anticipated to be a driver of September consumer price inflation, and that the country should expect a further rise in coming months.

“We should now expect to see more pressure from the rise in the global oil price, although continued shilling stability is a compensating factor,” said Ms Khan.

In Uganda, core inflation is projected to rise above the five per cent target over the next 12 months. Tanzania’s rate is around five per cent, while Rwanda’s is at around three per cent.

Currencies

Regional currencies could also come under pressure from rising fuel import bill, widening countries’ current account deficits, with higher payments eating into dollar reserves.

Citi Bank Africa economist David Cowan has forecast pressure on the Kenyan shilling if the import bill widens.

“However, the surge in Brent crude prices will slow down effectively allaying fears of a rise in energy prices not just in Kenya but throughout the East African region,” he said.

For Kenya, any weakening of its currency would raise product prices, given that they are paid for through importation channels via the US dollar.

Since January 2016, when the crude oil price hit an all-time low of $28.06 per barrel, the Kenyan economy has been cushioned from external shocks through a smaller petroleum products import bill, which stood at $560 million mid last year.

However, this had increased to $821 million at the end of June this year, The country is also seeing pressure on its cash reserves, burning through $1.17 billion in the past four months. Central Bank data shows that the country’s reserves dropped to $8.43 billion at the end of September, from a record $9.5 billion in April, as it tried to cushion the local currency.

The currency is also set to face an onslaught from last month’s decision by the US Federal Reserve to increase the Federal Funds Rate to a range of up to 2.25 per cent from the 1.75 per cent set in June 2018.

Opec

Meanwhile, the US State Department issued a statement on Wednesday asking Opec to boost production by tapping the supply buffer it maintains in case of unexpected disruptions. It even gave a figure for how much more the group could pump — 1.4 million barrels a day.

The US president has been putting pressure on Opec’s largest producer Saudi Arabia to pump more, even going as far as threatening the military alliance between the two countries that has underpinned the balance of power in the Persian Gulf for decades. The strategy has worked in one sense.

“We’re doing everything we can, ” the Saudi minister said at the Russian Energy Week conference in Moscow on Thursday. The kingdom’s production has risen from below 10 million barrels a day in the first five months of the year to about 10.7 million currently, Mr Al-Falih said.

November will probably be higher, he said, potentially breaking the Saudi production record set in November 2016. The kingdom is willing to tap all of its spare capacity, Mr Al-Falih said.

But promises like this don’t seem to be reassuring the market. There are echoes of 2008, when prices hit an all-time high above $140 a barrel and pledges of more supply only increased the fear of disruptions.

— Additional reporting by Bloomberg.

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