OIL & CURRENCY

Weak shilling to deny Kenyans full benefits of cheap oil

In Summary
  • Oil prices in the international market  are down by about 40 per cent this week. 
  • Mihr Thakar projects super petrol to fall to Sh60 in the next reading.
A fuel attendant at metro station. File
A fuel attendant at metro station. File

The weakening Kenya shilling might eat into the benefits of cheap oil in the international market even as Brent oil prices dropped to a 20-year low yesterday.

The international oil marker fell as much as 17 per cent in Asia trade to $15.98 a barrel — its lowest point since mid-1999 — before recovering slightly to around $17 as markets opened in Europe. Prices are down by about 40 per cent this week. 

On Monday, US oil prices traded below zero for the first time in history ever, meaning producers or traders were paying other market participants to take the oil off their hands, sending shock waves in the global oil sector.

 

Global oil prices have been plummeting since late February, thanks to Russia and Saudi Arabia price wars.

The drop has been escalated further by Coronavirus fear that has shuttered almost every social-economic sector, cutting down fuel demand by almost 40 per cent.

Even though the global oil prices have dropped significantly, the impact will not be fully felt in Kenya with the shilling sliding against the dollar, pushing up import costs.

Onn Monday, the shilling dropped to an all-time low of 107.25 against the dollar, forcing importers to spend more to bring in goods, eventually passing the high import cost to consumers.

Last week, the Energy and Petroleum Regulatory Authority (EPRA) significantly lowered fuel prices relieving the financial burden from many Kenyans feeling the financial impact of COVID-19.

In its monthly fuel review, the regulator saved motorists Sh18 on super petrol budget per litre. Kerosene, which is used by many households, was reduced by Sh18.8 per litre while Diesel was reduced by Sh4.09 per litre.

The changes in this month’s prices were because of the average landed cost of imported Super Petrol decreasing by 34.61 per cent from $472.59 per cubic metre in February to $309.03 per cubic metre in March.

 
 

Diesel decreased by 9.89 per cent from $480.21 per cubic metre to $432.70 per cubic metre and Kerosene decreasing by 37.70 per cent from $421.24 per cubic metre to $262.44 per cubic metre.

Although fuel prices are expected to drop further as the current global crisis  persists, economic experts are of opinion that the weak currency may deny locals full benefits. 

Terry Miheso, an oil markets analyst based in Dubai told the Star that the shilling which is likely to hit 1o8 against the dollar by end month will push up prices for June and not May.

''I expect May rates to drop slightly. The shilling was in the margin of 105 three weeks ago, when imports for the coming month were made. The impact of the recent drop to 107 against the dollar will be felt in June,'' Miheso said in a message. 

His sentiments are echoed by Reginald Kadzitu, chief economic officer at  Zamara Asset Managers.

''The largest component of our import bill is petroleum products 14 per cent, this will have a reducing effect on the import bill, however the oil cycle in kenya is 60 days so the next shipment will be cheaper but what happens within those days in the oil markets determines the next cost,'' Kadzitu said. 

Financial expert and economist Mihr Thakar  said  the local demand is down, adding that the portion of imports that serve manufactures  as well as trading goods would be affected by slowdown in business activities. 

He projects super petrol to fall to Sh60 in the next reading.

You can't have a 76 per cent collapse in the oil price and then expect oil imports to be affected by seven per cent depreciation in the local unit. However, the reduction in price is subject to the regulator's decision to 'cushion oil importers','' he said.