Hope for cheaper pump prices as cost of crude oil plunges

As the world oil industry goes through a price turmoil, Kenyans can look forward to reaping some benefits, albeit not immediately.

The price of fuel is a major gauge of the cost of living, determining what Kenyans pay for transport and the cost of goods.

Tuesday, panic gripped global traders, a day after US crude futures crashed below zero for the first time in history as the Covid-19 crisis crippled energy demand and worsened a supply glut.

PRICE CRASHED

The price of US oil crashed into negative for the first time in history on Monday as demand dries up amid the coronavirus crisis. The cost for a barrel of US crude to be delivered in May dropped to negative $37.63.

The drop occurred because contracts for May deliveries were to expire yesterday and traders are set to run out of storage within the next two weeks. The negative price means traders were paying buyers to take the oil off their hands.

With the world airlines that consume about five million barrels a month grounded, the buyers have nowhere to stock their products, leading to a near market collapse.

Kenya imports its oil products from Saudi Arabia and the United Arab Emirates, which will be hurt by the current market tumble.

Market players in Kenya are unanimous that the fall in crude prices would have a significant bearing on prices locally, but would not state by how much.

Mr Pavel Oimeke, the director-general of the Energy and Petroleum Regulatory Authority (Epra), said Kenyans should expect a significant reduction in pump prices for petroleum products if the trend is sustained.

CRUDE PRICING
Oil marketers agree with this: “The negative crash of crude oil prices was in the US, and we don’t buy crude. But the direction of crude pricing is always indicative of the direction the pricing of refined products will take,” said Mr Martin Kimani, the managing director of Rubis.

His counterpart at Total Kenya, Mr Olagoke Aluko, concurred, saying: “It’s what is happening across the world and so it’s only natural to expect further drops.”

Kenyans will, however, reap the benefit from the next imports, which could take more than a month to arrive.

According to an expert in the industry, Kenya has a 60-day supply chain, from the time the fuel is ordered to the time it gets to the market.

The prices are regulated by Epra, which applies a formula agreed with the Ministry of Energy. The formula allows oil marketers to make a profit of seven shillings on every litre sold.

It is expected that by June, the Kenyan prices will come down if the orders are placed today.

A week ago, the prices of petrol and diesel dropped by Sh18 and Sh4.09 per litre respectively, to retail at Sh92.87 and Sh91.37 in Nairobi, down from Sh110.87 and Sh95.46 respectively.

Kerosene recorded the biggest margin drop by Sh18.18 to Sh77.28 a litre in the city, according to the latest monthly prices set by Epra.

Petroleum products in Kenya are sourced through an open tendering system where all the oil firms have an opportunity to source the product.

LOWEST PRICE
The oil marketing firms submit their requirements for a month and the quantities are aggregated. Each firm then looks for suppliers for the entire amount and the firm that gets the supplier with the lowest price imports the commodity on behalf of the rest. Because of the large quantities, they can negotiate better prices from suppliers.

Once the oil arrives in the country, it’s stored by Kenya Pipeline Company and in the storage facilities of some of the firms, and each firm collects its quota.

“Firms are expected to have only a month’s stock, which they should sell as they anticipate the new stock. If they don’t sell, they get penalised,” said a stakeholder in the oil industry.

The firm that imports the oil enjoys a cash flow benefit as it can negotiate a 90-day credit period with the supplier, but gets paid by fellow marketers as soon as the oil gets to the country.

Global oil prices have slumped this year due to population lockdowns to forestall the spread of coronavirus and a price war between Saudi Arabia and Russia.

The glut of unwanted crude is filling up storage infrastructure as the pandemic crushes global demand.

The losses came despite signs that the virus, which has infected almost 2.5 million people and killed 170,000, is easing as global lockdowns begin to take effect, allowing some countries to slowly return to normality.

Analysts warned the drop in stocks could be an indication that the recent surge may have been too much too quick and another sell-off is possible.

The flight to safety was reflected in currency markets, where the dollar soared against high-yielding, riskier units. The Australian and New Zealand dollars and Russian rouble were all down more than one per cent, while the Indonesian rupiah sank 0.9 per cent.

JUNE CONTRACT
On April 9, oil producing nations, including Gulf Cooperation Council (GCC) states and Russia, agreed to historic oil cuts as the coronavirus pandemic continues to crush global demand for crude.

According to the International Monetary Fund (IMF), the world is likely to experience its worst recession since the 1930s and the combined economies of GCC states are forecast to shrink by 2.7 per cent this year.
This week’s massive sell-off came ahead of Tuesday’s expiry of the May contract and as most traders moved to the June contract.
“The simplest explanation for negative oil prices is that … players are now paying buyers to take oil volumes away as the physical storage limit will be reached. And they are paying top dollar,” said Rystad Energy analyst Louise Dickson.
Oil markets have been ravaged this year after the pandemic was compounded by a price war between Saudi Arabia and Russia.
While the two big oil producing nations have drawn a line under the dispute and agreed with other countries to slash output by almost 10 million barrels a day, that is not enough to offset the lack of demand.

Equity markets were meanwhile also deep in the red yesterday, having enjoyed a healthy couple of weeks, thanks to massive stimulus measures and signs of an easing in the rate of new infections globally.

The IMF last week projected the six Gulf states along with oil exporters in the Middle East and North Africa will lose more around $230 billion in oil revenues after oil prices dropped by more than 60 per cent this year.

The global lender also forecast that economies of the Gulf states will shrink by 2.7 per cent, their worst performance in several decades.

In its World Economic Outlook, IMF said the damage would be much worse than the region’s last major shock, the 2008-09 global financial crisis, when it managed to post modest growth.

Its report was prepared before the Opec+ grouping, which takes in OPEC producers and allies, reached agreement on Sunday to cut output by nearly 10 million barrels per day, the largest in history.

GAS PRICES DECLINED

From mid-January to end-March, oil prices dropped by 65 per cent or $40 a barrel and natural gas prices declined by 38 per cent, the IMF said.

It also projected prices to remain below $45 a barrel through 2023, around 25 per cent below the average last year.

Given that the recent drop in prices in Kenya were as a result of the February prices, it is hoped that the price will drop tremendously by May or June.

“It’s worth noting that the diesel cargoes used in the computation of this month’s prices were procured in February when the crude oil prices were relatively high.

‘‘Accordingly, the effect of the recent crash in crude oil prices will be reflected in the retail price of diesel in subsequent reviews,” said Epra boss Oimeke in a statement.