Kenya’s fuel supply deal with three state-owned Gulf firms faces a critical test in the wake of the war between Israel and Iran, which threatens oil supplies, freight charges, and an increase in fuel prices.
Israel’s decision to start attacking Iran’s energy infrastructure, with strikes on at least two gas processing plants and two fuel depots, has poured more risk into the global energy markets.
Risks of traffic disruptions through the Strait of Hormuz, a narrow waterway in the Middle East that supports the export of a third of the world’s seaborne oil and gas, could affect the price and availability.
This looks set to pile pressure on the renewed contract with Saudi Aramco, Emirates National Oil Co. and Abu Dhabi National Oil Co, given the pact guarantees Kenya a steady supply of petrol, diesel, kerosene and jet fuel despite a global energy crunch.
The two-year extension, which was inked in April, is also based on fixed freight and premium costs, which were negotiated downwards by up to 13 percent.
But Israel’s conflict with Iran has sparked a surge in oil-shipping rates for Middle Eastern routes after some tanker owners and managers paused offering vessels as they assess risks from the war, fueling concerns overflows from the region.
Key rates for supertankers voyaging from the Middle East to East Asia rose almost 60 percent in less than a week, according to shipbrokers and charterers quoted in Bloomberg News, as exporters who had been trying to book ships were met with few offers.
The surge in freight costs could test the appetite of the three Gulf countries to absorb the extra expenses should the conflict drag on.
Brent crude, the global benchmark, surged 12 percent to a high of $78.5 a barrel in the early hours of Friday after Israel launched strikes against Iran’s nuclear programme and military facilities.
Prices fell back to $73 a barrel, but traders warn of a spike if markets become convinced of prolonged attacks on oil infrastructure and disrupted flows through the Strait of Hormuz.
This could upend the price of petrol, diesel, and kerosene that Kenya has agreed with Saudi Aramco, Emirates National Oil Co. and Abu Dhabi National Oil Co under the 180-day credit plan that is also meant to ease pressure on forex reserves and support the shilling.
Local economists say a prolonged conflict will stoke inflation on costly fuel and complicate policymakers’ decisions on the direction of benchmark interest rates, which have been falling as the cost-of-living measure falls.
“This is still a developing story. Any logistics disruptions would trigger inflation even though we are still in the early days,” said Mentoria Chief Economist Ken Gichinga.
“It’s a risk you have to flag as a policymaker; geopolitics is shaping the global economy this year.”
Narrow waterway
Oil traders highlight the risks should Tehran respond by attacking oil facilities in the Gulf or tankers in the Strait of Hormuz.
About 21 million barrels of oil from Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates pass daily through the narrow waterway separating the Islamic Republic from the Gulf states, representing about a third of the world’s seaborne oil supplies.
Iran has repeatedly threatened to close the strait in the event of an attack but has never been able to block all traffic. Although it is a pinch point for flows of crude, the strait is still 35 miles wide at its narrowest point.
“A closure of the strait, though unlikely at this time, would represent the most extreme action Iran could take,” Amena Bakr, head of Middle East and Opec+ at energy analytics group Kpler, told the Financial Times.
“While US troops in the region would promptly react and reopen the strait, this would push Brent prices way above the $100 a barrel threshold.”
At a $100, pump prices in Kenya would surge as the three state-owned Gulf firms adjust prices to match the global trends.
A litre of diesel currently retails at Sh162.91, while petrol sells for Sh177.32 in Nairobi, compared to Sh190.38 and Sh199.15 respectively in March last year.
These are based on the barrel at $72.6.
Fuel prices make a big contribution to inflation in Kenya as it relies heavily on diesel for transport, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
Three state-owned Gulf firms that import fuel to Kenya on credit earned Sh1.5 trillion in the two years to May as Kenya renewed the contract beyond the 2027 elections.
Under the renewed contract, the fixed freight and premium costs dropped 11 percent to $78 (Sh10, 081) per metric ton of diesel, seven percent to $84 (Sh10, 875) for petrol and 13 percent to $97 (Sh12, 532) for jet fuel.
It marked the second time authorities have renewed the contract first drawn up in 2023 as part of a strategy to ease pressure on forex reserves and to support the shilling.
Kenya renegotiated lower margins came in the wake of a damning audit that revealed that consumers paid billions of shillings in additional cost of petroleum products under the government-to-government oil deal.
Before Israel’s strikes against Iran on Friday, the Central Bank of Kenya (CBK) had warned that tensions in the Middle East and uncertainties over the US tariffs posed risks to Kenya’s economy.
The CBK cut Kenya’s growth forecast this year to 5.2 percent from 5.4 percent while slashing expected remittances by Sh12.7 billion.
“Although the US and China have retreated on their previously announced tariff levels, the outcomes of bilateral trade between the US and key trading partners remain highly uncertain,” CBK said in a statement on Tuesday last week.
