Budget surplus to reach KD 11-13 bln this fiscal yr

KUWAIT CITY, Dec 22: After the volatility seen for much of the year, November was a quieter month for crude oil prices. The price of Kuwait Export Crude (KEC) traded in the narrow range of $105 to $108 per barrel (pb) for most of the month, with modest upward pressure in the middle of the month fading out by early December. Brent crude traded in a similarly narrow range of $108-111 pb for most of November. West Texas Intermediate (WTI) — the benchmark US blend — remained at a significant discount, at $85-$90. The average November WTI spread below Brent reached a 2012 record of $23. Against KEC, it reached an all-time high of $20.

The broad stability of prices can be linked to a receding — for now at least — of both the European sovereign debt crisis and geopolitical tensions in the Middle East. But these issues have not been resolved, and either could emerge as a dominant market theme in early 2013. Attention has now shifted to the US ‘fiscal cliff’, which could potentially tip the US economy into recession next year. But even here, the complexity of the negotiations and the seeming intransigence of both sides of the debate have encouraged market participants to adopt a wait-and-see approach.

Meanwhile, oil market fundamentals remain evenly balanced. Although a loosening of the supply-demand balance is widely anticipated for 2013, the extent of the shift is uncertain. One key factor in this is OPEC policy. At the organization’s meeting on December 12th it decided to leave its overall production levels unchanged — officially at least. Its ability to make a coordinated and decisive policy move is complicated by internal political dynamics as well as external forces affecting some of its members’ output. These include Baghdad-Kurdistan relations in Iraq, international sanctions on Iran and supply disruptions in some African states. The consensus is that OPEC will need to cut output significantly to prevent prices from falling next year.

Oil demand outlook
A weak global economy means that oil demand growth is seen improving only slightly in 2013, following a modest rise in 2012. Analysts expect incremental oil demand of around 0.7 to 0.9 million barrels per day (mbpd), or 0.8% to 0.9%, up from 0.7 to 0.8 mbpd this year. Surprisingly, the improvement comes from OECD markets where demand — though still seen falling — is expected to do so at a slower pace than in 2012. Growth in emerging economies on the other hand, is positive at 1 mbpd or more, but expected to slow. A combination of fiscal austerity, structurally weak growth in the Eurozone, banking sector weakness, and growth in alternative fuels are forecast to undermine oil demand in developed markets for the foreseeable future. In emerging markets, however, there is still scope for oil demand growth to remain solid, particularly through the use of looser policy to offset weakness in major export markets.

Oil supply outlook
Crude output of the OPEC-11 (i.e. excluding Iraq) fell slightly by some 64,000 bpd in October to just under 27.8 mbpd, a 12-month low. The bulk of this decline came from Nigeria, where output plunged to its lowest level in 3 years. This was the second month of 100,000 bpd, or larger, declines in the country, due to a combination of severe flooding in the oil producing Niger River Delta region and a force majeure declared by Shell following a series of sabotage and vandalism incidents. Iran has also seen significant declines with output falling to 2.6 mbpd in October, almost 1 mbpd lower than a year ago. Iranian oil production levels have now been overtaken by Iraq, Kuwait and more recently the UAE. Elsewhere, there were some considerable production gains, notably in Angola where output was up by 108,000 bpd following the completion of field maintenance work.

Total OPEC production (including Iraq) was down for the second consecutive month to just under 31 mbpd. Iraqi oil output, which has seen significant production increases this year, was down only slightly by some 5,000 bpd to 3.2 mbpd. However, data from ‘direct communication’ or official government figures, point to much larger declines of 200,000 bpd. Further expansion of Iraq’s upstream capacity will depend on the development of key infrastructure projects, which so far have seen slow progress.
Following significant increases in the final quarter of this year, non-OPEC supplies are seen rising further by 0.1-0.3 mbpd in 1Q13. At least one-third of this increase will come from OPEC natural gas liquids (NGLs). Non-OPEC supplies have been driven by the continued surge in North American production. In total, global oil supplies are expected to have risen by more than 2 mbpd this year, and are seen rising more modestly in 2013 as lower OPEC production partially offsets continued increases in non-OPEC supplies.  

Price projections
Our forecast horizon covers the relatively short period to 1Q13. Given soft demand and rising non-OPEC supplies, oil market fundamentals are expected to loosen over this period. Based upon a 0.1 mbpd quarter-on-quarter decline in global oil demand in 1Q13, and a non-OPEC supply increase at the higher end of expectations and a modest cut in OPEC supply of 0.2 mbpd, global oil inventories are seen rising by a large 1.3 mbpd in the first quarter. In this scenario, the price of KEC is expected to fall in early 2013, but remain close to $100 pb. 
If, on the other hand, expected cuts in OPEC production are not realized in 1Q13, then stock levels would rise even further to some 1.5 mbpd. In this case, the price of KEC would fall steeply to under $100 pb in 1Q13 and further thereafter. This would subsequently prompt OPEC members to lower production levels before the end of the year.
Alternatively, growth in non-OPEC supplies could turn out below expectations in the first quarter — or oil demand could turn out stronger, perhaps receiving a boost from a cold winter. In this case, the price of KEC remains supported at above $100 pb in early 2013 and rises thereafter.

Budget projections
The three scenarios described above would generate average oil prices of $104 — $105 pb for this fiscal year. Together with high oil production rates, this indicates another bumper year for government budget revenues. Indeed, official figures for the first half of FY2012/13 reveal that revenues reached KD 16.0 billion, above the government’s projection for the entire year. If as we expect, spending comes in 5-10% below the government’s forecast and revenues much higher, this year’s budget surplus could end up between KD 10.8 billion and KD 12.6 billion before allocations to the Reserve Fund for Future Generations (RFFG). This would equate to 22% to 25% of forecast 2012 GDP.

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