East African countries are set to feel the economic impacts of squeezed oil supply after top producers effected massive production cuts due to declining demand across the globe, caused by the Covid-19 outbreak.
On Thursday OPEC member states met in Vienna, Austria and agreed to cut oil output by an extra 1.5 million barrels per day in the second quarter of 2020 due to plummeting demand.
“Global oil demand growth in 2020 is now forecast to be 0.48 million barrels per day down from 1.1 million barrels per day in December 2019. The unprecedented situation, and the ever-shifting market dynamics, means risks are skewed to the downside,” said OPEC in a statement.
While East Africa, a net importer of crude oil, is set to benefit from the decline in prices, substantial cuts in production could have ripple effects in terms of supply in a region where demand is on the rise. Since the start of the year, Brent oil prices have fallen by an average of 20 per cent from $63 per barrel on January 1 to a low of $50 per barrel this past week.
“Production is guided by supply and demand of petroleum products in the world market. If demand is low due to coronavirus, then fewer products will be refined and hence less crude oil is required,” said the director-general of Kenya’s Energy and Petroleum Regulatory Authority (Epra) Pavel Oimeke.
Oil exporting countries like South Sudan and Sudan, and whose main export market is China, are also grappling with an uncertain future. Sudan, for example exported 60 per cent of its average 134,000 barrels per day production in 2019 to China.
Crude prices will continue to face pressure as the virus spreads across the globe disrupting key sectors like manufacturing, transport and aviation. Goldman Sachs projects that prices could decline to a low of $45 per barrel in the coming weeks before recovering to settle at $60 per barrel towards the end of the year.
To stem further drops, Opec has set in motion efforts to balance output and prices by effecting output cut. Early last month Opec and other oil producers resolved to cut output to 500,000 barrels a day bring total production cut to 1.7 million barrels a day in a span of two months as part of efforts to stabilise prices.
“The cut may stabilise prices given that the biggest factor for pricing is still global oil demand which is uncertain,” said Gerald Muriuki, research analyst at Genghis Capital.
Oil demand in China, which consumes 14 million barrels a day has dropped by three million barrels, — the biggest drop recorded in more than a decade. This has precipitated ripple effects across the globe with oil major BP sending a warning that global oil demand will be down by 300,000 to 500,000 barrels a day on average this year.
According to Mr Oimeke, although the expected further cuts in production are not expected to disrupt supply in East Africa, meeting demand of petroleum and petroleum products could be affected. In Kenya, petroleum products are the second largest import commodity accounting for 25 per cent of the country’s total imports. In both Uganda and Tanzania, refined petroleum constitutes the bulk of imports at 16 per cent of total imports.
For South Sudan, the decline in demand in China is forcing it to look for alternative markets for its crude.
Source: East African