Crude prices rise on improved demand outlook, supply cuts Budget surplus expected between KD 12 and 14 billion this year

KUWAIT CITY, Feb 13: Crude oil prices saw steady gains through January, with some benchmark prices reaching their highest levels since September. The price of Kuwait Export Crude (KEC) rose from $107 per barrel at the end of December to $112 by early February, averaging $108 for the month. Brent crude climbed as high as $118 on 1st February, up $6 in a month to its highest level since May.
The main US benchmark — West Texas Intermediate (WTI) — rose a similar amount. At $17 pb in early February, WTI’s discount to Brent has narrowed considerably from a peak of $25 in November. Some analysts attribute this to new US pipeline capacity, which has eased the supply glut at WTI’s trading hub in Cushing.
The steady rise in prices has been driven by a number of factors, including an improved outlook for the global economy. Recent economic data from both the US and China has been encouraging, whilst the air of crisis surrounding the Eurozone has faded — for now at least. Meanwhile, on the supply side, Saudi Arabian crude output fell to its lowest level in 19 months — 9.2 million barrels per day (mbpd) — in December, a drop of 0.4 mbpd from November. Saudi authorities linked this to a fall in seasonal demand from its customers rather than a deliberate change in policy. Nevertheless, the move was a signal that OPEC is prepared to respond quickly to signs of looser market fundamentals.


Oil demand outlook
Forecasts for global oil demand growth in 2013 have generally been revised up over the past month, thanks mainly to estimates of stronger demand in 4Q 2012 than previously thought, which generates a higher base starting point for this year. Most analysts now see demand growth of 0.9 to 1.0 mbpd in 2013 (or around 1.1%), up around 0.1 mbpd from a month ago though slightly down on 2012 levels. Demand growth in China has been revised up and China is one of the few major places where growth is expected to be stronger than last year. Demand growth continues to be driven by emerging markets (+0.9 mbpd). In OECD countries, demand is once again expected to fall (-0.4 mbpd), though by less than in 2012 thanks to improved economic fundamentals.


Oil supply outlook
Crude output of the OPEC-11 (i.e. excluding Iraq) fell by a significant 269,000 bpd in December to 27.4 mbpd — almost 1.3 mbpd below its April peak. OPEC production for 2012 as a whole averaged 28.1 mbpd, more than 1 mbpd higher than the previous year. The large decline in December came on the back of sharp reductions in Saudi Arabian output. Production was cut by some 421,000 bpd to 9.2 mbpd — Saudi’s lowest output since May 2011. Additionally, Iranian output continued to be affected by sanctions, dropping to 2.7 mbpd in December from 3.5 mbpd at the start of the year. Meanwhile, large production gains were witnessed in OPEC’s West African producers Nigeria and Angola. The former saw output rebound sharply by some 137,000 bpd after three consecutive months of declines, as flooding-related disruptions waned.


Total OPEC production (including Iraq) dropped considerably in December to below 30.4 mbpd. This was driven by large declines in Iraq, where output plunged by about 197,000 bpd to a 6-month low of 3.0 mbpd — though official figures point to larger declines of some 255,000 bpd. Iraqi oil production during the month was affected by a number of technical and political issues, including loading problems with offshore terminals in the South and the ongoing dispute between Baghdad and the Kurdistan Regional Government. Despite this, Iraqi output averaged almost 3 mbpd for the year as a whole — the highest production level since the late 1970s.
After rising by an estimated 0.9 mbpd in 2012, non-OPEC supplies are expected to climb by more than 1 mbpd this year. Less than one-quarter of this increase is expected to come from OPEC natural gas liquids (NGLs). Instead, the expected surge is likely to come from strong North American production combined with a recovery in non-OPEC supplies elsewhere. In total, global supplies are expected to rise more modestly in 2013, following a rise of more than 2 mbpd last year, as cuts in OPEC output partially offset stronger non-OPEC supplies.

Price projections
With modest oil demand and strong non-OPEC supply growth expected in 2013, OPEC may need to remain active to prevent a weakening in oil markets and prices. Based on a consensus view of a modest 1 mbpd increase in global oil demand this year, and a hefty 1.6 mbpd increase in non-OPEC supplies, global oil inventories could rise by some 0.2 mbpd in 2013 despite anticipated cuts in OPEC production. In this case, the price of KEC could drift down gently, but continue to be supported near $100 pb.
If, on the other hand, growth in non-OPEC supplies is 0.3 mbpd lower than expected, then there is less pressure on OPEC to make significant production cuts. Supply will continue to exceed demand, exerting some downward pressure on prices. In this scenario, the price of KEC slips only slightly, but stays above $100 pb for most of the year.
Alternatively, non-OPEC supplies could receive a boost from stronger than expected North American production or a recovery in non-OPEC output elsewhere. In this case, the price of KEC falls sharply to below $100 pb by mid-2013. However, this will prompt OPEC members, specifically in the GCC, to make big production cuts in order to stabilize prices in the second half of the year.

Budget projections
With just two months remaining in the current fiscal year, the price scenarios described above are unlikely to impact budget outcomes for FY 2012/13 much, and the price of KEC is expected to end up at $105 — $106 pb. If as we expect, spending comes in 5-15% below the government’s forecast, this year’s budget surplus could end up between KD 11.9 billion and KD 14.4 billion before allocations to the Reserve Fund for Future Generations (RFFG).
The projections for the next fiscal year are linked to our three scenarios, which yield oil prices within the fairly narrow range of $98 to $103 pb in FY 2013/14. According to press reports, budgeted spending for the next fiscal year is set at KD 21 billion, although the number could subsequently be revised. Assuming that spending comes in below budget, we project a surplus of between KD 8.7 billion and KD 12.1 billion before allocations to the RFFG. This would equate to 18%-25% of forecast 2013 GDP, and would represent Kuwait’s 15th successive budget surplus.

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