Crude oil prices to send cost of petrol soaring

Petrol prices are set to rise past Sh90 a litre in the run-up to Christmas as oil marketers factor in rising crude oil prices at the pump.

The prices represent a 20 per cent rise since August and will be the highest since December, 2008 — piling pressure on inflation due to rising costs of transport and other goods and services that rely on fuel for production.

Oil marketers

Experts and oil marketers blame the continuing rise in prices at the local pumps on the surging crude prices driven by optimism over the pace of global economic recovery and increased speculation on the commodity by traders.

“The outlooks and past trends point to more expensive fuel in coming weeks and the possibility of unleaded fuel going past Sh90 is real,” says Mr Andrew Omolo, the managing director of Mogas—a local petroleum dealer.

A spot-check by the Business Daily showed that unleaded fuel was retailing at Sh86 a litre within the Central Business District (CBD) although it was still possibly to find same product in some branded stations selling at Sh80 outside the city centre.

The local pump prices have risen by between two and three shillings in November and from an average of Sh75 a litre in April when crude prices stood at $52 a barrel.

On Wednesday, crude prices stood at $78 a barrel and oil marketers Total Kenya and Kenya Shell say that this price is yet to be accounted for on the current prices.

“Prices here are based on the average for the previous month, and we are now consuming fuel that was bought at $74.37 a barrel,” said George Wachira, the director of petroleum focus consultants—a local energy consultancy firm.

This is clear signal that consumers are set for expensive fuel in coming days.

Kenya Shell said local pump prices would continue to move in line with crude oil prices.

Now, analysts led by Goldman Sachs and Merrill Lynch reckon the crude prices could rise to $85 a barrel by year end and to $100 mark in 2010 because of rising oil demand, economic stimulus plans and a weak US dollar.

“Prices may climb to $100 because of the bullish factors,” said Francisco Blanch, Merrill’s head of commodities research, said in a report dated Nov. 12.

Crude oil prices crossed the $100 a barrel mark in March, 2008, pushing local pump prices to Sh110 a litre.

The better than expected US third quarter growth of 3.5 per cent annually has sparked hopes of increased energy demand in the world’s largest oil consumer.

This, together with rising appetite for oil from China has in part contributed to surge in crude prices.

The fall in the dollar has also nudged traders to put their money in oil for protection against possible inflation—resulting in increased demand for the commodity on high speculation.

The effects of the rise in petroleum products could spread throughout Kenya’s economy.

Households will have to part with more money to meet their fuel expenses, a move that will see families left with less to spend on other products such as airtime and beer.

This is crucial given that most producers have been struggling to push their products in the market place due to the country’s soft economy.

Producers themselves could be pushed to increase their product prices that are often linked to the cost of petrol.

Public transport users will also be dealt a blow as operators are expected to increase fares as they pass on the additional expenses to consumers.

As a result, energy costs are set to join expensive food as drivers of the cost of living or inflation.

Already, Kenyans have seen the power bills soar by 60 per cent since March on rising fuel costs charges— a varying item on the bills that is linked to the amount of power on the national grid that is generated from the expensive fuel driven power generators.

Rising crude oil prices look set to drive electricity prices upwards at a time when the country is tapping deeper into the fuel generator to compensate for the drop in hydro- power capacity.

But the sharp rise in crude prices is set to be quietly appreciated in the local oil market.

The marketers tend to make bigger profit margins when crude oil prices are rising through selling some old cheaper stocks at higher prices.

The reverse happens when the prices start falling as it happened in the second half of last year.

“The effects of sharp drop in crude prices resulted in severely reduced margins, a result of holding expensive stocks at a time of falling prices,” said Total Kenya in May while announcing a Sh109 loss for the three months to March, compared to a profit of Sh141 in the same period a year earlier.

Oil prices hit an all-time high of almost $150 per barrel in July 2008 before the global financial crisis brought petroleum prices down tumbling to $40 in December that year but then bounced sharply back up.