Eyes on ERC as crude price drops to $59 a barrel

Oil prices yesterday plummeted to a 13-month low of $59 a barrel, promising a possible easing of pump prices that have been a pain to motorists since September’s introduction of value added tax (VAT) on petroleum.

Lower pump prices have a far reaching effect on the pricing of goods because it determines the cost of transport as well as moderating the energy segment of inflation by cutting the cost of producing thermal power.

Commercial Bank of Africa economists said in a note that Brent crude had fallen from a high of $86.74 per barrel in early October “as fears of oversupply coincide with reduced demand for the commodity.”

Kenya imports refined petroleum with a lag of between 30 and 45 days between the placement of import orders and delivery of the commodity.

The lag delays the enjoyment by motorists of any drop in global crude prices, especially when the drop is significant and rapid as has happened in recent weeks.

Ongoing slide in the price of crude began at the beginning of October, when a barrel of crude was priced at $86 to the current $59, meaning that the lower crude prices should filter through when new pump prices are announced mid next month.

Maximum benefits of the crude price drop are, however, likely to be felt in the January review when deliveries will reflect the November crude prices.

The Energy Regulatory Commission (ERC) increased the price of a litre of petrol in Nairobi by Sh2.38 to Sh118.11 in the mid-November review, while the price of diesel rose by Sh3.11 to Sh112.83 and kerosene by Sh2.99 to Sh111.83.

The prices also reflected the recently-introduced eight per cent VAT levy on petroleum products, which pushed up the price of petrol by Sh3 a litre for petrol and Sh6 a litre for diesel when it was first introduced in September.

The increase was based on the then higher crude price of $82.30 a barrel and a weaker shilling that moved from Sh100.88 to Sh101.16 against the US dollar in the period.

Although the depreciating shilling remains a concern that is threatening to derail the expected gains from lower crude prices, the slide appears to have been arrested in the past week.

After touching a 10-month low of 103.20 to the dollar last week, the Kenyan currency has now clawed back some ground against the dollar, and was yesterday trading at Sh102.40 to the dollar.

Motorists are expected to start enjoying a drop in the demurrage related add-on costs at the pump after Kenya Pipeline Company said it had finished construction of new storage tanks with a capacity to store 133 million litres of petroleum at its Nairobi Terminal.

The tanks have been built at a cost of Sh5.3 billion.

The additional storage, which came on board in June, has cut demurrage fees by 50 per cent, to about Sh1 per litre, KPC recently said in a statement.

Overall effect of the fall in crude prices is that it may help keep inflation within the Central Bank of Kenya’s preferred range of 2.5 to 7.5 per cent, especially given the relatively stable food prices.

It is also likely to benefit the shilling due to the reduced pressure on the current account, as oil importers will need fewer dollars to import their product.