Crude oil prices Monday plunged by more than a quarter after a fallout between Saudi Arabia and Russia to cut production in the wake of coronavirus, promising Kenyans cheaper petrol and electricity.
The indicative Brent crude price plummeted 25 percent to an average of at $33.90 a barrel, the steepest one-day decline since the 1991 Gulf War that has set up oil-importing economies such as Kenya for good times ahead.
This will feed into Kenya’s monthly price review of fuel, diesel, petrol and kerosene, when the energy regulator adjusts prices on April 15 given the Saturday adjustment will be based on early February crude prices.
The current pump prices are based on crude prices at $67.80 a barrel, says the Energy and Petroleum Regulatory Authority, a pointer that Kenya is set for lower petrol and cooking gas costs should the global turmoil persist for long.
Investment banker Goldman Sachs has cut its forecast for Brent to $30 for the second and third quarters of 2020 following an announcement from the International Energy Agency that oil demand was set to contract for the first time since 2009.
Saudi Arabia slashed its official selling prices and made plans to ramp up crude output next month after Russia balked at making a further steep output cut proposed by the Organisation of Petroleum Exporting Countries (Opec) to stabilise oil markets.
Costs of energy and transport have a significant weighting in the basket of goods and services used to measure inflation in Kenya. Cheaper diesel will also impact on monthly electricity prices given the fuel levy on power bills — which is influenced by petrol prices and amount of diesel generators in the national grid. The fuel levy is the biggest driver of monthly changes in power bills.
“Given that Kenya is a net importer of oil, lower international oil prices will be substantially positive for the balance of payments. Naturally, this will reduce imported inflation over time,” said Jibran Qureishi, the Stanbic regional economist for East Africa.
Pump price cuts
“Arguably, this rapid decline in international oil prices should with a two-month lag or so, reflect in domestic pump prices and lower headline inflation in the next couple of months, especially as base effects unwind.”
Inflation rose to a 10-month high of 6.37 percent in February from 5.78 percent in January, largely driven by increased food prices.
Given the scale of the price decline Monday, the April review should reflect one of the biggest pump price cuts since the price control was introduced on petrol in December 2010.
Kenya, which has set a cap on prices of petrol, diesel and kerosene, lists maximum prices for each county at mid-month and they remain valid for a month.
The last time crude was priced this low —in February 2016 — the energy regulator pegged the price of a litre of diesel at Sh65.70, and petrol at Sh85.58, but this was before the introduction of an eight percent VAT charge on the commodity.
In the February 14 review, a litre of diesel in Nairobi was set at Sh104.45, and that of super petrol at Sh112.87.
The comparison of the two prices offers a peek into how deep local pump prices could fall in coming months.
Saudi Arabia over the weekend cut its official selling prices for April for all crude grades to all destinations by between $6 and $8 a barrel.
“The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the signiﬁcant collapse in oil demand due to the coronavirus,” Goldman Sachs said.
China’s efforts to curtail the coronavirus outbreak has disrupted the world’s second-largest economy and curtailed shipments to the biggest oil importer. The virus has also spread to other major economies such as Italy and South Korea, hurting global demand for oil that has ultimately suppressed prices.
The International Energy Agency cut its annual demand forecast by almost 1 million bpd, signalling a contraction of 90,000 bpd.
In the short term, a sharp fall in crude oil price means inflation pressure that began to increase at the end of the year will ease. Oil is the single biggest item on Kenya’s import bill whose pricing has an immediate impact on the demand for dollars and ultimately the exchange rate.
“In 2019, Kenya’s petroleum product imports amounted to $3.31 billion, and the average price of our benchmark oil product was $66.5 per barrel. The benchmark price now has fallen to $51 per barrel, which portends significant savings,” the Central Bank of Kenya said last week ahead of the current crude oil price plunge.
Producers of services such as electricity and manufactured goods are also expected to factor in the lower cost of petroleum, unleashing a lower pricing pressure across the economy with ramifications on the cost of living measure.
In Kenya, for instance, the majority of the population relies on kerosene and gas for lighting and cooking, making crude price a key determinant of the rate of inflation.
Gas prices have in recent months dropped, with the cost of refilling a 13-kg gas cylinder at petrol stations falling to an average of Sh2,050 from 2,150 in September.
The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors with a direct impact on the cost of agricultural produce as Kenya enters the ploughing season, which runs from February to April.