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Kuwait- Budget surplus seen between KD 9.8b and KD 12.8b this yr  Join our daily free Newsletter

MENAFN - Arab Times - 18/11/2012

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(MENAFN - Arab Times) Crude oil prices continued to weaken in October, pushing some benchmarks down to their lowest levels since mid-year.

The price of Kuwait Export Crude (KEC) averaged 108 per barrel (pb) in October and had slipped further to 103 by early November, nearly 12 below its mid-September high. The price of Brent crude appeared to fall decisively below the 110-115 range that persisted through much of the third quarter, reaching 106 in early November. West Texas Intermediate (WTI) - the benchmark US blend - has fallen to just 85. The spread between Brent and WTI is now re-approaching the highs of 30 pb seen in 2011, thanks in part to this year's surge in US oil production.

Price weakness through October and early November was attributed to a number of factors. Firstly, the onset of Hurricane Sandy in late October - aside from taking a personal toll - saw major disruption to economic activity along the US east coast, including loss of electricity demand as businesses and homes were evacuated, and the shutdown of mass transit systems.
Although this put crude oil prices under downward pressure, the impact on the oil complex more generally was mixed: gasoline prices rose as logistics disrupted fuel deliveries and stock levels fell. The long-term impact of the storm on oil prices is not expected to be large. One view is that the eventual rebuilding of local infrastructure could imply a small boost to activity and demand over the medium-term.

Broader economic factors also played a role in undermining crude prices. Weak economic data in the US, as well as signs of a further slowdown in Europe deepened the gloom surrounding the global economy. This was subsequently exacerbated by political developments in the US: the re-election of President Obama and a divided Congress refocused attention on the so-called 'fiscal cliff', which threatens to send the US economy into recession next year.
Despite this, however, the trade-weighted US dollar has strengthened 2% since mid-September on 'safe-haven' flows. A stronger dollar typically lowers the dollar price of crude in order to offset the movement in foreign currency terms.

Oil demand outlook
The fragile outlook for the global economy translates into expectations for modest oil demand growth next year among most analysts. Organizations such as the International Energy Agency, OPEC and the Centre for Global Energy Studies (CGES) all forecast global demand growth of 0.8 million barrels per day (mbpd), or 0.9%, in 2013, similar to the 0.7 - 0.9 mbpd expected for this year. Demand in the OECD is seen continuing its steady decline, with Japanese demand expected to fall by up to 0.2 mbpd as the country restarts operations at some of its nuclear reactors. Meanwhile, non-OECD demand growth is seen more modest than in previous years, partly due to the knock-on effect of weak economic growth in key export markets.

Oil supply outlook
Crude output of the OPEC-11 (i.e. excluding Iraq) fell by a substantial 275,000 bpd in September to just below 2.8 mbpd. The largest declines were witnessed in West African OPEC members Angola and Nigeria, who were ironically the largest gainers the previous month. Output fell by 179,000 bpd and 137,000 bpd respectively, due to maintenance programs in Angola and severe flooding in Nigeria.
Production in Venezuela was also hurt by an outage at the country's largest refinery and crude production fell by some 33,000 bpd. These declines were met by smaller increases in Libyan and GCC output, which together rose by around 94,000 bpd. Alternative figures from 'direct communication', however, point to reduced production in these MENA countries.

Total OPEC production (including Iraq) fell to an 8-month low of 31.1 mbpd. This came in spite of a 10,000 bpd increase in Iraqi oil production, which recorded its third consecutive month of plus-3 mbpd output. Following a Baghdad-Irbil deal, Iraqi exports from Kurdistan are set to increase by around 50,000 bpd this quarter, and a further 50,000 bpd next year. However, last month, the Kurdistan government began exporting its own oil independently of Baghdad, a move that could lead to renewed disputes.
Non-OPEC supplies are now projected to increase by around 0.7 mbpd in 2012, with OPEC natural gas liquids (NGLs) contributing more than half of this increase. In the remainder of 2012, strong North American production is likely to offset non-OPEC supply disruption elsewhere, with supply losses from Hurricane Sandy believed to be minimal. In total, if OPEC-12 output remains at its current level, global oil supplies could rise by around 2 mbpd in 2012. Next year could see a slightly larger increase in non-OPEC supply.

Price projections
Despite weak global demand, oil prices could still hold up well for the remainder of this year. However, early next year, oil market fundamentals are likely to loosen on the back of rising US production. Under the CGES's forecasts, a 0.8 mbpd quarter-on-quarter rise in non-OPEC supplies in 1Q13 generates a huge 1.6 mbpd rise in inventories. While in this scenario the price of KEC would remain relatively firm in the near-term, it sets the stage for steep falls in the middle of next year.
If, on the other hand, US production turns out even stronger than expected, then prices could be set on a steeper downward path. In this case, the price of KEC falls below 100 pb early next year, and further thereafter. This would almost certainly prompt OPEC member countries to make production cuts to prevent prices from declining further.
Alternatively, demand could receive a temporary boost from cold winter conditions in the Northern hemisphere or non-OPEC supplies could once again disappoint. In this case, the price of KEC remains supported at above 100 pb for the remainder of this year and into 2013.

Budget projections
The three scenarios described above would generate average oil prices of between 104 and 107 pb for this fiscal year. The recently approved, and much delayed, official Kuwaiti government budget for FY2012/13 shows a 9% budget-on-budget increase in planned spending to KD 21.2 billion, as well as oil revenues based on a conservative average price assumption of just 65 pb. If as we expect, spending comes in at 5-10% below the government's forecast and oil revenues much higher, the budget could ultimately see a surplus of between KD 9.8 billion and KD 12.8 billion before allocations to the Reserve Fund for Future Generations (RFFG). This would equate to a surplus in the range of 20-26% of GDP, compared to the 30% recorded last year.


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