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Rebounding oil prices renew inflation threats

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Rebounding oil prices renew inflation threats


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Summary

  • Oil prices Monday rose to their highest in just over a year, with Brent futures bumping past $60 a barrel, a market report by Reuters showed.
  • The rise was boosted by supply cuts among key producers and hopes for further US economic stimulus measures to spur demand.
  • A sustained climb in oil prices signals heightened risks of imported inflationary pressure, which would reflect on consumer products and services.

A sustained rebound in global oil prices has triggered fresh inflationary risk in the Kenyan economy within the first-half of this year, with a sequel expected in energy and transport costs at a time when most households are still weighed down by the economic knocks of the Covid pandemic.

Oil prices Monday rose to their highest in just over a year, with Brent futures bumping past $60 a barrel, a market report by Reuters showed, boosted by supply cuts among key producers and hopes for further US economic stimulus measures to spur demand.

A sustained climb in oil prices signals heightened risks of imported inflationary pressure, which would reflect on consumer products and services.

“Considering that Kenya entirely depends on fuel imports, the rising prices will increase inflationary pressure also considering the weakening shilling. Fuel comprises a significant 14.6 percent of the Consumer Price Index, and also impacts transport and food costs,” Renaldo D’Souza, head of research at Sterling Capital, said.

‘’We, however, do not see this as a big risk in the short term and still see inflation remaining within the Central Bank of Kenya’s medium term range of between five percent and 7.5 percent with our average estimate at between 5.5 percent and six percent.”

Inflation in Kenya has ticked up in recent months, pressured by rising food and fuel prices. Food inflation hit a six-month high of 7.2 percent in December 2020 while fuel inflation struck 12.1 percent in January this year—the highest since October 2020.

Data by the Kenya National Bureau of Statistics (KNBS) shows that overall inflation in December stood at an eight-month high of 5.62 percent.

However, core inflation — the change in the costs of goods and services but excluding those from the food and energy sectors — averaged between 1.6 percent and 2.7 percent in 2020, an indication of the generally weak demand side pressure as purchasing power in the economy eroded due to Covid-related job losses and pay cuts.

Consumers are already shouldering the burden of increased food and fuel prices since the last quarter of 2020.

For example, diesel and kerosene jumped substantially last month on rising costs in the international crude market – turning the heat on farmers, poor households and transporters already hit by the economic downturn due to the coronavirus pandemic.

The price of diesel climbed by Sh4.57 per litre in the latest monthly review by the Energy and Petroleum Regulatory Authority (Epra) — the highest increment since July 2020.

Kerosene users were not spared a hit as the price of the commodity climbed by Sh3.56 per litre — the largest margin since August 2020.

The increase in diesel price at this time of the year deals a blow to farmers who are set to commence land preparation in readiness for a new planting season that will commence next month and coincide with the traditional March-April-May main rain season.

Kenya’s economy also largely relies on diesel for transportation and power generation, with the price increase expected to impact on the cost of living for households.

The jump in kerosene price also hit poor households hard, with a higher number of them having lowered their reliance on cooking gas in the wake of Covid-19.

The rally in global oil prices, however, comes as good news for Tullow Oil, which had been forced back to the drawing board to re-assess its Kenyan crude oil project in the wake of weakening crude prices in 2020.

“The world has significantly changed in 2020 with continued low oil prices of less than $45 (Sh4,925.25) per barrel, and hence, there is a fundamental need to redesign the development so that we can deliver an economic project at ‘lower for longer’ oil price world,” Tullow Oil Plc chief executive Rahul Dhir said while announcing the revision on plans.

The State had earlier indicated that it would cushion consumers whenever crude prices crossed the $50 a barrel mark through a subsidy which excludes petrol.

The subsidy would be supported by billions of shillings raised from fuel consumers through the Petroleum Development Levy, which was increased to Sh5.40 a litre in July 2020 from Sh0.40. Under the scheme, oil marketers would be paid the equivalent of the subsidy from the Petroleum Development Levy.

Epra acting Director-General Daniel Kiptoo, however, said that the regulations to manage the subsidy were not yet ready.

“The regulations to operationalise the levy are being developed in order to set up structures on how the fund will be managed,” he said.



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