Oil prices set to surge after producers announce plans to cut production

  • 7 Apr 2023
  • 3 Mins Read
  • 〜 by Mercy Kamau

Prices for petroleum products are set to go up after the major oil producers announced plans to cut their production up to 1.15 million barrels per day from May until the end of 2023.  Saudi Arabia announced the biggest cut among Organization of the Petroleum Exporting Countries (OPEC) members at 500,000 barrels per day. 

According to National Public Radio (NPR), the Saudi Energy Ministry described the move as a “precautionary measure” aimed at stabilizing the oil market. The cuts represent less than 5% of Saudi Arabia’s average production of 11.5 million barrels per day in 2022.

Among the reasons for this cut are concerns over weak global demand, punishing speculators, seeking higher prices, and tension with Washington.

According to local dailies of these countries, they will be producing the following barrels per day;

  •  Iraq – 211, 000 barrels
  •  United Arab Emirates – 144,000
  • Kuwait – 128, 000
  • Kazakhstan – 78,000
  • Algeria – 48,000
  •  Oman – 40,000.

Further, all are members of OPEC+ group of oil-exporting countries, which includes the original OPEC as well as Russia and other major producers. 

This comes amidst plans by the government to introduce Government-to-Government arrangements. This happened on 1st March 2023, when the government invited bids from foreign government-owned entities for the supply of petroleum products under the G-to-G arrangement. Subsequently, bilateral discussions with governments of potential IOCs were commenced.

Companies that participated in the bid were:

  •  Aramco Trading Fujairah FZE
  •    Emirates National Oil Company (Singapore) Private Limited
  •  OQ Trading Limited (Dubai)
  •  Socar Trading SA (Switzerland)
  • Trafigura PTE Ltd (Switzerland)
  •   Vitol Bahrain E.C (Bahrain)
  •  ADNOC Global Trading Ltd (UAE)

Since 2015, Kenya has been buying petroleum under what is known as the “Open Tender System (OTS)” coordinated by MOEP (Ministry of Energy and Petroleum).

The OTS tender would be floated every month, with the successful local Oil Marketing Companies (OMCs) purchasing the country’s fuel requirements for the 112 licensed oil marketing companies participating.

With the G-to-G framework, the government will facilitate the importation of petroleum products from foreign government-owned entities for the supply of petroleum products for a period of 270 days.

Further, the main agenda for these arrangements was to create a platform for the government to negotiate;

  •  Competitive Freight and Premium;
  •  and securing a minimum of 180 days deferred payment terms with the identified international supplier(s) (“IOC”).

Expectations from the proposed transactions

  1. Alleviate the demand for USD driven by petroleum purchases.
  2. Extending time required to source for USD liquidity from the current 5 days to 180 days.
  3. Increase the country’s forex reserves which will help decrease currency speculation, whilst revamping the country’s dormant interbank market.
  4. Result in a long-term reduction in the cost of petroleum products by leveraging economies of scale that arise from having longer supply contract(s) (270 days) with potential IOCs.

General structure of the G-G arrangement

The process contemplates LC tenors of 180 days and the identified foreign-based International Oil Company (IOC) (currently Aramco, ADNOC, ENOC) will receive payment in USD.

The identified IOC will then nominate local OMC(s) to import the petroleum products on its behalf.

The nominated local OMCs will work with banks to issue an Irrevocable Letter of Credit (LC) to the IOC.

 Local participants in the OTS will pay the nominated local OMC in KES for locally destined PMS & AGO while for transit products payment will be in USD;

The nominated local OMC will source for USD on or before the lapse of the 180-day credit period to meet the LC requirements.

What is the biggest change in this arrangement compared to OTS?

The government has stepped in to facilitate long-term contracts with foreign suppliers through their governments on an extended credit period of 180 days instead of the current 30 days to ease the forex crunch and ensure the availability of fuel.

Typically, the payment of petroleum products by local OMCs under the OTS will shift from USD to Kenya shillings for local supplies with an expected Letter of Credit maturity of 180 days. This eases the requirement for local companies to pay, within 1 week of delivery, approx. USD 500M monthly for current OTS arrangements.

  • The foregoing reduces pressure on the country’s USD liquidity.
  • The normal demand projection and import planning under the Open Tender System will continue and this will assure the security of the supply of petroleum products to the country.