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Thursday , April 22 2021

Where to Next for Kuwaiti Oil Production?

With a population of 4.6 million+ and an area comprising 18,000 km², Kuwait is one of the most densely populated countries in the Arabian Peninsula. Natural gas and oil comprise 40% of GDP.

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On 1 February 2019, the price of Kuwaiti oil was $60.64 per barrel. Fast forward to 1 February 2020, there is nothing in it. The price is $61 per barrel. Yet, when oil prices are extrapolated beyond 1 year, it is evident that dramatic changes have taken place since 3 October 2018 when the oil price topped out at $83 per barrel. The sharp sell-off saw the oil price plunging to $49.63 per barrel on 26 December 2018. Since then, a steady recovery has taken place as oil prices have consolidated around the current level.

There has been a 14% decline in oil prices since the beginning of 2020, spurred by any number of factors including geopolitical events, decreased demand, steady demand and excess supply, or a seasonal shift. Yet the latest oil price trend is directly attributed to weak demand vis-a-vis the coronavirus. Ever since the outbreak of a deadly influenza virus in Wuhan, China in 2020, global markets have reacted with caution. Tepid demand for stocks has filtered through to the oil markets, and Kuwait is not immune to the domino effect. Oil demand has plunged for multiple successive trading sessions, driving prices sharply lower as the global appetite for crude cools.

To date, hundreds of people have died and several thousand have been infected, with limited reports of new infections all over the world. According to Commerzbank, oil prices will not be able to sustain at their current levels with reduced demand and steady supply. OPEC may have to cut production to keep prices steady in the face of weak worldwide demand. Bloomberg reports that crude oil and natural gas futures with delivery in March 2020 are depressed, with WTI crude oil trading at $52.60 per barrel on the Nymex, and Brent crude oil trading at $58.85 per barrel on the ICE.

The generic first ‘co’ future Brent crude oil has a 52-week trading range of $54.88 on the low end and $71.75 per barrel on the high end. The current oil price dilemma was last seen in May 2019, and it is largely due to the catastrophic coronavirus, that OPEC is now considering all options. Heading into February 2020, oil futures plunged several percentage points in New York, dropping to a 5-month low. With the World Health Organisation, the Centers for Disease Control, and other health agencies around the world scrambling to contain the deadly coronavirus, market players are reacting with extreme caution. OPEC has been hard at work conducting damage control to discourage participants from shorting crude oil on the back of the global pandemic. While current buying and selling activity vis-a-vis crude oil is largely a knee-jerk reaction to the virus, it has a devastating effect on production and global economic activity.

What is Kuwait doing to diversify its economy away from crude oil?

The impact of weak oil prices on the Kuwaiti economy will likely be short-lived. This will affect the ‘near-term growth’ of the economy and have an impact on fiscal balances. Fortunately, the economy of Kuwait is not 100% reliant on crude oil for growth, development, and sustainability. The country ranks exceptionally high in terms of its banking sector, and it holds a substantial collection of financial assets, coupled with extremely low debt levels. Multiple government initiatives have been targeting private enterprise in the country, by deepening capital markets for the benefit of SMEs across the board, implementing structural and financial reforms, and reducing government interference and involvement in the economy. Kuwaiti Macroeconomic developments include the following:

  • Accelerated credit growth, facilitated by the Central Bank of Kuwait in 2018.
  • The MSCI Kuwait index jumped 29% in 2019, indicating strong equity market performance.
  • The capital adequacy ratio of the Kuwaiti banking sector is solid. In September 2019 it was measured at 17.6%, indicating that banks have an abundant supply of equity for short-term financing.
  • Strong non-oil growth in 2019 continued, but low oil prices have dragged down the economy.

The country’s GDP (2018 figures) was measured at $30,661 per capita, with exports totaling $71,931 million, made up of petroleum exports at $58,393 million. The current account balance of the country was last measured at $20,481 million. Kuwaiti oil demand is 352.9 thousand barrels per day, and crude oil exports amount to 2,050,000 barrels per day.

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