Oil price rises as EU cuts Russian imports

European Union leaders agreed on a plan to block more than two-thirds of Russian oil imports.

In Summary

•Brent crude rose above $123 a barrel on Tuesday, the highest it has been for two months.

•So far, no sanctions on Russian gas exports to the EU have been put in place, although plans to open a new gas pipeline from Russia to Germany have been frozen.

A crude oil storage facility/
A crude oil storage facility/
Image: FILE

Oil prices have hit fresh highs after European Union leaders agreed on a plan to block more than two-thirds of Russian oil imports.

Brent crude rose above $123 a barrel on Tuesday, the highest it has been for two months.

Prices for oil and gas have soared in recent months, fueled by the lifting of lockdowns and the Ukraine war.

Locally, transport costs have increased in the last 31 days due to the raising cost of fuel.

Motorists will most likely face another hit at the pumps as government prepares to review monthly retail prices on June 14.

Currently, a litre of super petrol retails at Sh150.12 in Nairobi, up from Sh144.62. Diesel is going for Sh131, up from Sh125.50.

A litre of kerosene retails at Sh118.94, up from Sh113.44 until June 14.

Without the partial government subsidies, consumers would have paid Sh176.47 for a litre of petrol. Diesel would sell for Sh174.94 and kerosene, mostly used for lighting and cooking, would trade at Sh169.26. 

Latest Kenya National Bureau of Statistics (KNBS) Consumer Price Index and Inflation data shows fuel and food prices mainly contributed to high inflation rate in May.

The cost of living hit a 27-month record at 7.1 per cent.

Factors including the shortage and the cost of the dollar have also contributed to the rise in commodity prices in recent weeks.

On Monday, manufacturers raised concern over their struggle to raise enough dollars at a higher cost to facilitate essential foreign trade transactions such as raw material importation.

With banks selling the US currency for as high as Sh120, a number of manufacturers have been forced to cut supply a move that will likely add to the plight of consumers due to the foreseen shortage.

The situation is global as the rising energy costs continue putting pressure on consumers, making it more expensive to heat homes and drive.

Petrol hit a new record of 173.02p a liter on Monday, according to the AA.

At the same time, the average price of diesel in the UK rose to 182.58p a litre, it said.

Filling a typical 55-litre tank of a diesel now costs more than £100.

The war in Ukraine has pushed countries in the West to shun Russian energy supplies.

Russia currently supplies 27 per cent of the EU's imported oil and 40 per cent of its gas. The EU pays Russia around €400bn (£341bn) a year in return.

The ban agreed by EU leaders will see an immediate ban on Russian oil being transported into the bloc by sea. Two-thirds of Russian oil arrives by sea.

However, the deal, which followed weeks of wrangling, includes a temporary exemption for pipeline oil following opposition from Hungary.

Pledges by Poland and Germany to stop importing pipeline oil by the end of this year will raise coverage of the ban to 90 per cent of Russian imports.

Tough times

Brent crude, the global benchmark for oil prices, has risen more than 70 per cent over the past year.

Oil prices climbed again on news of the EU embargo, with Brent crude reaching its highest level since March.

Russ Mould, investment director at AJ Bell, said confirmation that the EU will cut its purchases of Russian oil by the end of 2022 is pushing up prices because European countries now need to find alternative sources of supply.

"It is not feasible to replace that amount of energy with other fuel sources, such as wind, solar, biomass or nuclear, in such a short space of time, so the EU needs to find oil and gas from somewhere," Mould said.

"This will not be easy because existing global output may well be on contract already, so competition for what is not on contract will now be hotter."

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said the upwards trajectory of oil prices may continue until Western countries outline clearly how supply is going to be sourced.

"It's possible this could get tougher before it gets better," she said.

"We know that rising energy costs are a particular challenge for households which already have severe pressure on their incomes, but smaller businesses shouldn't be left out of the equation either - this is a tough time to be heating offices, and at a time when it's meant to be about rebuilding resilience after the pandemic."

European Council chief Charles Michel said the deal cut off "a huge source of financing" for the Russian war machine.

It is part of a sixth package of sanctions approved at a summit in Brussels, which all 27 member states have had to agree on.

So far, no sanctions on Russian gas exports to the EU have been put in place, although plans to open a new gas pipeline from Russia to Germany have been frozen.

EU members spent hours struggling to resolve their differences over the ban on Russian oil imports.

Hungary, which imports 65 per cent of its oil from Russia through pipelines, resisted the new round of sanctions.

The cost of living crisis being felt across Europe has not helped either. Sky-rocketing energy prices - among other things - have curtailed some EU countries' appetite for sanctions which could also hurt their own economies.