Israel-Iran war threatens Kenya’s G-to-G fuel deal

By Newsflash Writer

Kenya’s government-to-government oil import deal with three Gulf state-owned firms is facing a major challenge following the outbreak of conflict between Israel and Iran—an escalation that threatens global oil supplies, raises freight costs, and could trigger a sharp increase in local fuel prices.

Israel’s military action targeting Iranian energy infrastructure, including strikes on two fuel depots and gas processing facilities, has intensified fears of disruption in global energy markets. The potential obstruction of shipping routes through the Strait of Hormuz—a strategic chokepoint for nearly a third of the world’s seaborne oil and gas—could impact both the cost and availability of fuel.

This presents a significant test for Kenya’s extended fuel import agreement with Saudi Aramco, Emirates National Oil Company, and Abu Dhabi National Oil Company. The pact, which ensures a consistent supply of petrol, diesel, kerosene, and jet fuel to Kenya, was renewed in April for two years and includes fixed rates for freight and premiums, which had been reduced by up to 13 percent during renegotiations.

Freight rates soar as oil tankers pull back

However, as conflict spreads in the Middle East, oil-shipping rates for vessels on those routes have surged. Bloomberg News reports a near 60 percent increase in shipping costs for supertankers from the Middle East to East Asia, driven by reduced vessel availability as operators reassess risks. The sharp rise in freight costs could test whether the Gulf suppliers will continue to absorb the added expenses if the conflict persists.

Brent crude, the international benchmark, spiked 12 percent to $78.5 per barrel following Israeli strikes on Iran’s nuclear and military sites, before settling at $73. Still, market analysts caution that a prolonged crisis could send prices soaring again—especially if oil infrastructure is further damaged or if flows through the Strait of Hormuz are seriously disrupted.

Such developments could derail the pricing structure Kenya negotiated with the three Gulf companies under the 180-day fuel import credit arrangement, which was designed to relieve pressure on foreign exchange reserves and stabilize the Kenyan shilling.

Local economic analysts warn that a prolonged war could trigger a rise in inflation due to more expensive fuel, complicating monetary policy decisions. “We’re still in the early stages, but any disruptions in logistics will raise inflation,” said Mentoria’s Chief Economist Ken Gichinga. “Geopolitical tensions are a major economic driver this year.”

Fear of Iran retaliation

Oil traders have flagged the risk of Iran retaliating by targeting Gulf oil facilities or tankers transiting the Strait of Hormuz. Around 21 million barrels of oil from Gulf states, including Iran, Iraq, Saudi Arabia, Kuwait, and the UAE, pass through the strait daily. While Iran has threatened to close the route in the past, it has never succeeded in halting all traffic. Despite being a known bottleneck, the strait spans 35 miles at its narrowest point.

“A full closure of the Strait of Hormuz, though unlikely, would be Iran’s most extreme move,” said Amena Bakr, head of Middle East and OPEC+ coverage at Kpler, in an interview with the Financial Times. “U.S. forces in the region would likely intervene quickly to reopen it, but Brent could easily breach the $100 mark.”

If global oil prices reach $100 per barrel, fuel costs in Kenya could rise steeply, forcing the Gulf suppliers to adjust local prices to match international trends. Currently, diesel retails at Sh162.91 and petrol at Sh177.32 in Nairobi, down from Sh190.38 and Sh199.15 respectively in March 2024, when Brent was at $72.6 per barrel.

Fuel prices significantly influence Kenya’s inflation due to heavy reliance on diesel in transport, electricity generation, and farming, while kerosene remains essential for cooking and lighting in low-income households.

Gulf companies’ earnings

The Gulf companies earned Sh1.5 trillion from oil exports to Kenya during the two years to May. The renewed agreement, which will run beyond the 2027 elections, includes reduced freight and premium charges: diesel dropped by 11 percent to $78 (Sh10,081) per metric ton, petrol by 7 percent to $84 (Sh10,875), and jet fuel by 13 percent to $97 (Sh12,532).

This is the second extension of the original 2023 agreement, intended to stabilize the Kenyan shilling and ease pressure on foreign reserves. The renegotiated terms came after a critical audit revealed Kenyan consumers were overcharged billions in petroleum costs under the original deal.

Before the recent Israeli strikes, the Central Bank of Kenya (CBK) had already warned of regional instability and global trade tensions affecting the local economy. The CBK revised Kenya’s 2025 growth forecast from 5.4 percent to 5.2 percent and lowered projected remittances by Sh12.7 billion.

“Despite a softening in U.S.-China tariff measures, global trade outcomes remain uncertain,” CBK noted in its latest statement, underlining the persistent risks to Kenya’s economic stability amid rising geopolitical shocks.