RISK

Oil marketing companies urged to factor volatile environment

Official data shows that oil products consumption in Kenya increased by 4.4 per cent in 2019 reaching 6.2 million mt

In Summary
  • The recent depreciation of the Kenya shilling against the dollar has resulted in substantial realized FX losses in the oil marketing industry which is worrying.
  • The OMCs are also exposed to volatility in the interest rates particularly on long term borrowing since the sector is capital intensive with borrowing predominantly done in foreign currency($ rates).
A fuel tanker offloads petrol at a petrol station in Mombasa.Photo Elkana Jacob
A fuel tanker offloads petrol at a petrol station in Mombasa.Photo Elkana Jacob

Oil marketing companies need to learn how to manage forex reserves and interest rate risk in the current volatile environment, experts at Stanbic bank have said.

“The recent depreciation of the Kenya shilling against the dollar has resulted in substantial realized FX losses in the oil marketing industry which is worrying,” said Renato D Souza, Head Oil and Gas and Public Sector at Stanbic.

OMCs, therefore, need to adopt various strategies to mitigate FX risk since they are exposed to commodity price risk in the unlikely event they are unable to liquidate stock quick enough in a declining price environment.

Renato also added that it is hard to predict the impact of Covid on demand but it is expected that demand will rebound in Q3 and Q4 as economies open up.

Official data shows that oil product consumption in Kenya increased by 4.4 per cent in 2019 reaching 6.2 million mt with LPG expected to grow rapidly through to 2035 on the back of an increase of Kerosene tax.

The OMCs are also exposed to volatility in the interest rates particularly on long term borrowing since the sector is capital intensive with borrowing predominantly done in foreign currency($ rates).

According to Ranveer Singh, Manager CIB Sales Global Markets at Stanbic the level of volatility has gone up due to the depreciating currency however he expects the dollar to trade in a 104.5-105.0 range until end December 20.

“The currencies had drifted upwards as global risk aversion rose, triggering foreign portfolio outflows from both the equity and fixed income markets seeing the shilling depreciate as the dollar appreciates,” said Rasveer.

“The worst for the shilling is perhaps behind us but as the pandemic situation and global risk sentiment are so fluid, notable upside risks to the dollar/shilling remain,” he added.

The decline in oil imports however looks positive for the shilling while official capital inflows from multilateral donors should boost FX reserves and somewhat offset the weakness in export earnings.

Stanbic experts recommended an investment option to the OMCs referred to as the vanilla call which enables protection against adverse movements of the currency and ensures complete participation in a stronger shilling environment.

According to the latest CBK weekly bulletin, global financial markets activity remained subdued during the week as the recent investor optimism arising from reopening of economies was dampened by OECD’s forecast of a six per cent contraction of the global economy in 2020.

International oil prices increased during the week supported by OPEC’s decision to maintain production cuts and the continued optimism about a recovery in global demand.

Murban oil price increased to $41.25 per barrel on June 11 from $39.14 per barrel on June 4.