Business Daily (Nairobi)
Zeddy Sambu
6 November 2007
Nairobi — International agencies have forecast an oil supply shortage next month, signalling a possible leap in crude prices to a new record high.
The International Energy Agency (IEA), the Energy Information Agency (EIA) and the Organisation for Petroleum Exporting Countries (Opec) forecasts all pointed to a looming oil supply shortfall as the year draws to a close, citing strong demand and fears of supply disruptions.
Their projections - taken as a near reflection of expected demand - oscillate between 86.9 million barrels/day (mb/d) and 88.2 mb/d, starting January, 2008. (One barrel is equivalent to 159 litres).
Past attempts by Opec - the global oil cartel which supplies 40 per cent of the global oil market - to stem the price surge by upping production does not appear to have had an impact. The cartel maintains that there is no fundamental justification for recent surge in crude price past $88 per barrel.
The cartel of 12 oil producing nations meets early next month in Abu Dhabi to reassess the market situation and set supply levels for the winter season. The upcoming third summit of heads of State and governments of Opec member countries, takes place later this week in Saudi Arabia to enhance the cartel's price stabilising role and ensure adequate supplies to meet growing demand.
With indications that barrel prices are likely to climb further, players in the local oil market said they expect pump prices to touch Sh90 a litre of premium fuel in the next four weeks.
By yesterday, pump prices had climbed to a peak of Sh86.49 per litre of premium petrol in some parts of Nairobi -- a move that analysts said could hurt consumers and oil marketers alike. Oil marketers said crude oil prices above the $90 per barrel could assume permanence as the world psychologically adjusts to a future of high oil prices.
High oil prices are expected to impact negatively on net importers of such as Kenya by fuelling inflationary pressure as happened in the early 1980s causing an economic recession. George Wachira, the general manager at the Petroleum Institute of East Africa (PIEA) maintained that there was no justification for high oil prices and blamed market speculation for the turbulence.
Demand is expected to hit 86.9 mb/day (13.8 billion litres) per day early next year according to Opec estimates. This estimate is below EAI projection which stands at 87.4 mb/d and IEA's 88.2 mb/d.
"These estimates point to a tight supply towards the end of 2007 with high prices and large stocks draw downs," says an Opec report released last week.
Strong growth in the Chinese economy and the threat of an outbreak of war in Northern Iraq have been blamed for the current upsurge in crude prices. Opec's October monthly oil market report puts demand for Opec crude in 2007 at an average of 31.1 mb/d, an increase of 0.1 mb/d over last year's average. It projects world oil demand in the fourth quarter to follow a typically high seasonal consumption as winter sets in the Northern hemisphere .
In 2008, growth is forecast at 1.3 mb/d or 1.5 per cent higher, mainly on upward revisions for growth in China (0.4 ) per cent and India's 0.3 per cent. Last week, crude price set a new record high of $94 a barrel having risen by 14 dollars in two weeks. Local marketers warned consumers to brace for further price hikes as sharp rise in freight and crude costs are passed down the chain.
Kenya Shell and Kenol/Kobil with a combined marketing share of 45 per cent reckons that the current crude prices are yet to reflect at the local pump stations pointing to a possible sharp price rise in the coming weeks.
Current pump prices are based on crude prices purchased in September when the average crude price stood at below $77 per barrel. Kenya buys crude from the international market monthly through an Open Tender System (OTS) in which one marketer imports one month worth of crude on behalf of other players. Marketers have, however, expressed dissatisfaction with the system, arguing that it prevents them from hedging or purchasing crude oil in bulk when prices are low.
Consumers should expect a surge in commodity prices as high fuel prices look set to push the cost of production upwards, a move that will see producers pass on the extra costs to consumers in the form of higher producer prices.
"Should crude price maintain the current trend, inflationary pressure will follow suit," said Jacob Omolo an analyst at Institute of Policy Analysis and Research (IPAR).
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