How China’s zero-Covid protests will affect fuel prices

Crude oil prices hit the lowest mark this year as protests in top importer China over strict Covid-19 curbs fuelled demand worries, setting the stage for lower pump prices in Kenya. PHOTO | POOL

By JOHN MUTUA More by this Author

Crude oil prices hit the lowest mark this year as protests in top importer China over strict Covid-19 curbs fuelled demand worries, setting the stage for lower pump prices in Kenya.

The international benchmark crude fell to $80.92 a barrel — the lowest since January 10 — amid uncertainty about the outlook of the world’s second-largest economy.

Current pump prices in Kenya are based on the barrel at $98.06, signalling that a sustained drop will translate to further cuts in local pump prices.

READ: Falling global crude prices raise hopes of relief at the pump for

In the latest review, a litre of super petrol, diesel and kerosene has been trimmed by Sh1 for the next month to Sh177.30, Sh162 and Sh145.94, respectively on the back of subsidies.

Without the subsidy, a litre of diesel in Nairobi would have retailed at Sh180.82 from the current Sh162 while the price of a litre of petrol would have dropped to Sh167.36 from the current Sh177.30.

A combination of global factors has seen the price of diesel surge faster than that of other fuel products and crude oil.

Worsening China’s Covid outbreak and a series of stunning street protests in cities across the East Asian nation threaten to derail economic activity and sap demand for energy, food and raw materials—offering relief to consumers in the short term.

A return to stricter lockdowns would further squeeze demand for a number of key commodities.

China is the largest importer of everything from oil to iron ore and soybeans, and purchases have already slowed down this year as the economy has stumbled.

Kenya’s energy regulator reckons that the impact of China's woes on local pump prices will be felt in January.

“We have a lag of two months in pricing and probably the impact will be felt in January. But there are other variables like forex exchange and crack spread,” Daniel Kiptoo, the director-general of the Energy and Petroleum Regulatory (Epra), told the Business Daily yesterday.

Fuel prices have a big effect on inflation in Kenya, which relies heavily on diesel for public transport, power generation and running farm machinery.

This forced the energy regulator to offer a huge subsidy on diesel to ease the pressure on inflation and curb the simmering public anger over the high cost of essential commodities like diesel, which affects that ordinary Kenyans.

The State opted to provide an Sh18.79 with a litre subsidy on diesel, with motorists running on petrol paying half of the financial aid.

Petrol users are paying Sh9.94 for every litre of diesel consumed in efforts to reduce the State burden on catering for the subsidy.

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The use of the subsidies marks a U-turn by the William Ruto administration, which had in September announced its intention to scrap them, saying they were unsustainable.

Like in other parts of the world, Kenyan inflation has accelerated, mainly due to the knock-on effects of a jump in crude oil prices. It stood at 9.6 per cent in October up from 5.0 per cent at the start of 2022.

“The market is right to be anxious about forward fundamentals, due to significant Covid cases in China and a lack of clarity on the implementation of the G7′s price cap,” American investment bank Goldman Sachs said in a note.

Demonstrations broke out in Beijing, Shanghai and other cities over the weekend against pandemic-induced restrictions.

Discontent has intensified since a fire in the city of Urumqi killed 10 people last week, prompting vigils across China as authorities denied allegations that the coronavirus restrictions had hampered rescue efforts and prevented residents from escaping the blaze.

The Group of Seven (G7) and European Union diplomats have been discussing a price cap on Russian oil of between $65 and $70 a barrel, with the aim of limiting revenue to fund Moscow’s military offensive in Ukraine without disrupting global oil markets.

But a meeting of EU government representatives, scheduled for November 25 evening to discuss the issue, was cancelled, EU diplomats said.

The price cap is due to come into effect on December 5 when an EU ban on Russian crude kicks off.

Investors are also focusing on the next meeting of the Organisation of the Petroleum Exporting Countries and allies, known as OPEC+, on December 4.