Coronavirus and oil: Kenya in a catch-22 situation as prices fall
John Otini and Agencies
A sharp drop in crude prices due to the deadly coronavirus that originated in the central Chinese city of Wuhan could ease the pain among local manufacturers and consumers.
However, the World Bank has in the past warned that the declining crude oil prices are not good for exploration activities, saying lower crude prices could discourage investment in exploration and development, specifically for new undertakings.
The sharp fall in global oil prices come at a time when Tullow Oil, the British firm exploring oil in Turkana, is experiencing problems abroad, which may put Kenya’s oil wealth dreams in jeopardy.
It has said part of the current review of operations will entail slashing the amount of money it will be investing across its operations, citing unfavourable market conditions brought about by the declining prices of crude oil.
Global fears
Global markets cut oil forecasts even as global fears about the economic fallout from the virus is affecting the prices of iron ore, palm oil, copper, steel and aluminium, giving respite to Kenyan manufacturers who spend top dollar to import the products.
The drop in prices is informed by lack of demand from Chinese manufacturers with activities slowing down as Chinese government cracks down on travel to contain the outbreak.
An official at the Energy and Petroleum Regulatory Commission (EPRA) told Business Hub that if the situation persists in the next one month, then prices of oil will fall sharply.
“We did an open tender in January and the next one is in March, but prices have dropped on Brent and WTI and Murban crude so the bias is towards cheaper imports,” said Bernard Wanjala, a price analyst at EPRA.
Analysts reckon also that the coronavirus could force prices lower at least for the next three months or even push the world into a recession because China is a key driver of global growth.
“Prices are tumbling and we expect oil to even move lower than $50 a barrel at least in the next three months before the virus is contained,” said Ian Kahangara, senior dealer, global markets at Standard Investment Bank.
He observed that with everyone shutting down and flights are being grounded, prices cannot hold anymore.
Companies whose fuel bills are set to fall include Mabati Rolling Mills, Devki Steel Mills, East Africa Cables, Kaluworks and Pwani Oil.
China is the biggest importer of commodities across the world and a drop of demand normally hits prices across the world.
Airline companies such as Kenya Airways are also witnessing a fall in jet fuel oil prices as more planes are grounded in fear of coronavirus.
Oil prices are down from $70 a barrel last December to $50. The prices, however, recovered to $54 after Organisation of Petroleum Exporting Countries (Opec) said it was planning to cut output in response to coronavirus outbreak.
The world’s biggest oil producers are said to be discussing more production cuts, on top of those which have been in place since 2016, to boost falling prices.
On Monday, Opec member Iran publicly called for measures to support oil prices as the coronavirus hit demand.
Output cuts
The statement came as so-called Opec+, which includes Russia, will reportedly discuss output cuts of between 500,000 and one million barrels a day at a meeting expected to take place this week.
Margaret Yang from CMC Markets said the market was expecting production to be cut by 500,000 barrels a day, but added: “We won’t rule out an even deeper cut should the situation worsen.”
Oil slid sharply over the past two weeks on concerns over the global economic impact of China’s coronavirus.
