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Crude prices slip after steady Dec on Libyan supplies, dollar Kuwait budget surplus seen between KD 11.8 and 13.3bn in FY 13/14

KUWAIT CITY, Jan 18: Crude oil prices were more or less flat through December, before weakening in early January. The price of Kuwait Export Crude (KEC), for example, averaged $106 per barrel (pb) in the month, unchanged from its end-November level. However, it slipped to $103 in the first week of the new year. Similarly, Brent crude averaged a steady $111, then fell to $107 in early January. The price of West Texas Intermediate (WTI) — the main US crude benchmark — was comparatively volatile, averaging $4 above its end November level, at $98, before falling to $92 in early January. This volatility was supported by US-specific factors. The absence of significant price movements in December was not surprising. Major oil market news was reasonably thin on the ground, and traders typically avoid taking large positions at year-end. The drop in prices in early January, however, came on bearish news for fundamentals.

US oil product inventories rose more than expectations — although some of this could be reversed in subsequent data as the recent US cold snap boosts demand. Meanwhile, protesters at a major Libyan oil facility agreed to lift a blockade which had shut-in some 0.3 million barrels per day (mbpd) of crude. On the financial side, the imminent start-up of the US Fed’s ‘tapering’ program boosted the dollar, which typically erodes support for crude in dollar terms.  On average, crude prices held up well through 2013. The price of KEC averaged $105 through the year, down only slightly from a record $109 in 2012. Brent averaged $109, down from $112 a year earlier. Despite moderate growth in oil demand, oil prices were supported by a series of supply outages and disruptions from key producing nations, including Nigeria, Libya, and Iran. This helped partially offset strong growth in non-OPEC supplies. As a result, global oil inventories likely rose more modestly than in 2012. Note that the price of WTI bucked the softer price trend, rising $4 to $98, helped by the rollout of new US oil infrastructure that boosted demand for US crude.

Oil demand outlook
Analysts’ forecasts for global oil demand growth in 2014 have been revised up over the past month. This comes on the back of improved projections for US oil demand, after consumption in September was reported to register its strongest annual growth in nearly a decade.  The International Energy Agency now sees global oil demand growing by 1.2 mbpd in 2014, or 1.3%, from 1.1 mbpd (1.2%) last month. However, in light of upward revisions to demand estimates for 2013, global demand growth is no longer expected to see an acceleration this year.  

Oil supply outlook
Crude output of the OPEC-11 (excluding Iraq) dropped by some 587,000 bpd to a two-year low of 27.4 mbpd in November — according to data provided by ‘direct communication’ between OPEC and national sources. Production fell for the fourth consecutive month, and has now fallen by more than 2 mbpd since July.  This was mainly due to deepening outages in Libya. The current turmoil has shut in all but 0.2 mbpd of Libyan production, compared to a post-revolution high of almost 1.6 mbpd last year. Output declines were also seen in West African producers Angola (111,000 bpd) and Nigeria (86,000 bpd) due to field maintenance and other supply disruptions.

Meanwhile, production in Iran rose by some 100 kbpd to 3.3 mbpd (though secondary sources reported a lower figure of 2.7 mbpd). Nevertheless, the six-month interim nuclear deal will continue to prevent Iran from increasing exports, implying limited scope for a further rise in production in coming months. Total OPEC production including Iraq also fell to under 30.5 mbpd, despite a continued recovery in Iraqi output. After plunging to an 18-month low in September, production in Iraq was partially restored in the following two months, reaching 3.1 mbpd in November. However, a combination of security issues, port maintenance and bad weather are expected to have derailed production in December.

Supply disruptions in some OPEC members have so far allowed Saudi Arabia to maintain high output levels. But in 2014, a potential rise in Libyan and Iraqi output — coupled with rising non-OPEC supplies — could force Saudi to make production cuts in order to support oil prices. Non-OPEC oil supplies are projected to increase by a significant 1.7-2.0 mbpd in 2014, of which 0.2 mbpd is expected to come from OPEC natural gas liquids (not subject to quotas). If aggregate OPEC output remains at current levels (with cuts in Saudi output offsetting increases by other OPEC producers), the average output level should be lower in 2014. But global supplies could still increase by 1.3-1.6 mbpd, following an estimated increase of 0.8 mbpd in 2013.

Price scenarios
Oil market fundamentals are expected to weaken in 2014 as supply exceeds demand once again. However, downward pressure on prices could be limited by supply-side concerns and an improving demand outlook. Using the consensus view of a 1.2 mbpd increase in global oil demand in 2014 and a significant 1.7 mbpd increase in non-OPEC supplies, global inventories could rise by 0.4 mbpd. If OPEC holds output near current levels — resulting in a year-on-year cut in its average output of 0.4 mbpd — the price of KEC would begin to slip slightly in the second half of 2014, but remain supported at near $100.
If, on the other hand, non-OPEC supplies come in at the higher end of expectations, then oil inventories could rise by a large 0.7 mbpd in 2014. In this case, the price of KEC drops below $100 by mid-2014, and below $90 by year-end. OPEC, led by Saudi Arabia, would likely cut production in order to prevent such a large drop in oil prices. Alternatively, if demand growth turns out 0.3 mbpd stronger than expected this year, oil prices could rise sharply. In this scenario, the price of KEC accelerates to $110 in early 2014 and further thereafter.

Budget projections

The three scenarios above generate oil prices in the narrow range of $103 to $105 in the current fiscal year. Although this is below last year’s $107, this still indicates another bumper year for government revenues. Indeed, official figures for the first half of FY2013/14 reveal that revenues reached KD 15.8 billion, some KD 2 billion short of the government’s projection for the entire year. If as we expect, spending comes in 5-10% below the government’s forecast, this year’s budget surplus could end up between KD 11.8 billion and KD 13.3 billion before allocations to the Reserve Fund for Future Generations (RFFG). This would equate to between 23% and 26% of 2013 GDP.

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