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October 22, 2018

Rallying Oil Prices Threaten to Slow Down Economic Growth

Fuel Oil tanker/FILE
Fuel Oil tanker/FILE

Following the Great Oil Bust of 2014, which saw oil prices fall from a high of approximately USD 115/barrel to USD 36/barrel in early 2015, representing a 40% price drop, the price of oil may be experiencing a price rally that could push it over the USD 100/barrel mark. Geopolitical risks, coupled with supply side constraints indicate further increases in the price of oil from the current high of USD 84.78/barrel, experienced this past Friday, to a potential USD 100/barrel by January 2019, or so analysts predict.

 Geopolitical factors are arguably the main cause of current price increases on the value of oil in the global oil market. Particularly, the imposition of economic sanctions on Iran by the US, effective 04 November 2018, has led to an anticipated significant supply gap in the oil market.

This, analysts predict, is quantifiable as a two million barrel/day supply gap, that can only be plugged by the combined efforts of Saudi Arabia, Russia, and OPEC.

However, that said, it is to be noted that risk averse analysts predict that the global economy can only cope with a maximum 1.5M barrel/day supply gap, even given combined efforts by the world’s largest oil producers.

 Coupled with the above, production constraints currently being experienced in Nigeria, Libya and Venezuela do not bode well for global price of oil.

All these factors point at major supply constraints that threaten to disrupt the delicate supply and demand balance required in the oil industry to maintain prices at affordable and non-disruptive levels.

These constraints will be reflected by significant increases in the price of oil globally, which are expected to slow down the robust growth being experienced in the global economy.

 Drilling down to the Kenyan impact of the above, it is expected that the Energy Regulatory Commission (ERC) will seek to review the pump price of petroleum products upwards later this month, with similar increases expected in November through to early next year.

This comes at a time in the Kenyan economy whereby the price of petroleum products is at a record high, following the enactment of the Finance Act 2018 which imposed VAT on petroleum products at the rate of 8%.

This translated to petrol, the most commonly utilized petroleum product, retailing at USD 1.18/litre at the pump.

Following global fluctuations in the price of oil, Kenyans can expect this price to increase in the coming months, thereby aggravating the already high cost of living.

 A potential benefit, however, of the rising price of crude oil in the international markets, is that Kenya is currently testing these markets with its crude oil.

A rise in the spot price of oil globally may indicate that Kenya may be able to get more dollars per barrel of oil in the coming months.

 

Karen Kandie – MD IDB Capital

 

 

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