Jitters as oil prices hit high of 6 months

Global oil prices rose to their highest mark this year on Tuesday in reaction to a decision by the US to end all sanction waivers on Iran by May 1, setting the stage for higher prices at the pump.

Brent crude prices -- the international oil price benchmark -- rose above $74 (Sh7,511) per barrel for the first time in six months.

The US on Monday asked all purchasers of Iranian oil to stop making orders by next Wednesday or face sanctions. The demand ends six months of special waivers which had allowed the Asian nation to sell limited volumes to key buyers.

“Maximum pressure means maximum pressure. We are fulfilling our promise to get Iran’s oil exports to zero and deny the regime the revenue it needs to fund terrorism and violent wars abroad,” US Secretary of State Mike Pompeo said in a statement.

Reuters reports show that until last year, when the US reimposed sanctions on Iran, the Asian country was the fourth-largest producer among the Organisation of the Petroleum Exporting Countries (Opec) at around three million barrels per day (bpd), but April exports have shrunk to below one million bpd, according to ship tracking and analyst data in Refinitiv.

The announcement by the US stirred crude markets on Tuesday, sending prices rising on supply concerns.

The increase may see fuel prices in Kenya rise for the third straight month, further squeezing consumers’ disposable incomes at a time when the prices of foodstuffs has also risen due to delayed long rains.

Commodity prices

Although some parts of the country have already reported the onset of rains, it will take months before agricultural commodity prices can stabilise.

Kenya is an importer of refined petroleum products. The landed cost rises with an increase in crude oil prices globally and this cost is then added to transportation costs, taxes and levies and passed on to the consumer as retail price.

During the mid-April price review by Energy Regulatory Commission (ERC), the cost per litre for petrol, diesel and kerosene increased by Sh5.25, Sh5.52 and Sh2.76 respectively as the average landed cost shot up.

Crude oil prices rose from $66.35 (Sh6,734.52) in mid February to $68.60 (Sh6,962.90) in mid-March. But the price then crossed to $70 (Sh7,105) a barrel on April 5 and has not retreated below this since then.

A further rise in global crude prices would spell trouble for Kenya, whose local currency is already relatively weaker against the dollar. It means consumers in Kenya will have to pay more to import fuel. Unlike in March when the shilling was quoted at 100.47 against the US dollar, it has ceded ground trading at above 101.50 as at yesterday midday.

The direction of Brent crude price will now depend on the ability of global oil markets to cope with the Iran disruption.

A mismatch in the number of barrels demanded as well as different crude grades required by the market may lead to a further spike.

Cut oil production

OPEC and non-OPEC partners had last year agreed to cut oil production by 1.2 million barrels of oil a day.

Saudi Arabia and many other oil producers had targeted at least $70 a barrel as a good price to help finance their budgets.

Iran has been producing about 2.5 million barrels of oil a day and exported about 1.3 million barrels a day for the past five months, making it a crucial player in meeting world oil demand.

The US has downplayed risk of a surge in oil prices with Mr Pompeo arguing that US and other non-OPEC oil producers have already increased production and replaced Iranian exports.

“We have commitments from oil producing countries, including the Kingdom of Saudi Arabia and the United Arab Emirates, to increase oil production to offset reductions in Iranian oil exports,” he said.