Seasonal crude rush: oil prices rise
Crude oil prices climbed higher in early July, after trading broadly flat through May and June. The price of Kuwait Export Crude (KEC) rose from a trough of $97 per barrel (pb) in late June to $103 by July 12th. Similarly, Brent crude prices climbed by some $9 to $109 its highest level since early April. Both crudes are still some $11 off their February peaks. Meanwhile, West Texas Intermediate (WTI) the main US benchmark blend accelerated by some $12 to $106, exceeding the $100 mark for the first time since May of last year. In the process, the Brent-WTI spread narrowed to its lowest in two and a half years.
The recent rise in prices seems to have been largely driven by seasonal factors. The summer period typically sees a rebound in global oil demand as the holiday ‘driving season’ in the United States boosts gasoline consumption and the Middle East region burns more crude to meet the surge in air-conditioning needs.
Historically, 3Q quarter-on-quarter oil demand has risen by 1.1 million barrels per day (mbpd) on average. This year, the International Energy Agency (IEA) forecasts that the seasonal increase will be ‘steeper than normal’ due to more crude demand from the start-up of new refineries in the Middle East and Asia. Additionally, a large drop in US crude inventories and concerns over oil supply disruptions via the Suez Canal (due to the turmoil in Egypt) have also added to upward pressure on prices.
But given the broader slowdown in the global economy in 2013 in addition to rising oil supplies the risks to market fundamentals should be on the downside. Recently, the International Monetary Fund further reduced its forecast for global economic growth this year. The downgrade comes on the back of slower growth in emerging markets (including China), a deeper recession in Europe, and a weaker US expansion. On the supply side, non-OPEC oil production is expected to rise strongly this year adding to expectations of loosening market fundamentals.
Oil demand outlook Forecasts for global oil demand growth in 2013 have been largely unchanged over the past month, despite the weaker outlook for the global economy. The IEA still sees demand growing by 0.8 mbpd, or 0.9%, compared to 1.0% last year.
Meanwhile, the Center for Global Energy Studies expects global demand growth to come in at a slightly more pessimistic 0.7 mbpd, or 0.8%.
OECD demand is expected to fall by 0.5 mbpd (1.1%), while non-OECD is seen rising by 1.3 mbpd (2.9%). Forecasts for China have been trimmed to reflect lower growth, although Chinese demand is still expected to account for almost a half of the increase in global oil demand. Oil supply outlook Crude output of the OPEC-11 (i.e. excluding Iraq) climbed for the second consecutive month, rising by 129,000 bpd to 27.4 mbpd in May. Production in Saudi Arabia saw its largest surge in 18-months up 144,000 bpd to 9.4 mbpd. Figures from ‘direct communication’ site more significant increases of some 347 kbpd to 9.7 mbpd.
Other Gulf producers also raised output in response to higher seasonal domestic demand. These gains were partially offset by reduced production in Iran (38,000 bpd), Libya (27,000 bpd) and Nigeria (21,000 bpd).
Iranian output fell to 2.6 mbpd almost 0.5 mbpd lower than a year ago — as sanctions continue to curb output. Meanwhile, security issues have undermined production in some of OPEC’s African producers over the past couple of months, including protests and strikes in Libya and theft-related disruptions in Nigeria. Total OPEC production (including Iraq) rose further to 30.6 mbpd now 0.6 mbpd above OPEC’s output ceiling. This came despite reduced output from Iraq, where production edged down slightly by 22,000 bpd to 3.1 mbpd in May. Although Iraqi output is expected to grow in coming months, more significant increases are likely to be derailed by ongoing delays in the start-up of key projects.
Non-OPEC supplies are projected to increase by around 0.9-1.2 mbpd in 2013, of which at least one-quarter will come from OPEC natural gas liquids (NGLs). Strong North American production is likely to compensate for expected reductions elsewhere, including maintenance-related North Sea cuts and the possible cessation of recently restored South Sudan output. In total, global oil supplies are expected to increase by less than 1 mbpd in 2013, as cuts in OPEC output partially offset stronger non-OPEC supplies. Price projections Oil market fundamentals are expected to weaken in the second half of the year, though OPEC production cuts are likely to prevent prices from falling too far below the organization’s unofficial $100 target level. Based on the CGES’s slightly more pessimistic view of a 0.8% increase in global oil demand, and a large 1.3 mbpd increase in non-OPEC supplies partially offset by OPEC production cuts, global oil inventories could rise by a modest 0.6 mbpd in 2013. In this case, the price of KEC slips only slightly in the second half of the year, but remains close to its 2Q13 average of $100 pb. If, on the other hand, non-OPEC supplies turn out 0.3 mbpd stronger than expected in 2H13, then OPEC will need to make more aggressive production cuts in order to prevent a significant slide in oil prices. In this scenario, the price of KEC falls to around $95 pb in 2H13, and to below $90 pb early next year.
Alternatively, non-OPEC supplies could come in 0.3 mbpd lower than expected in 2H13, allowing oil prices to be supported at above $100. In this case, the price of KEC hovers at just above $100 pb for the remainder of the year, before slipping slightly in 1Q14. OPEC will still need to reduce output early next year in order to prevent oil prices from falling further. Budget projections Although the closing accounts for FY2012/13 have not yet been released, we expect the budget to have recorded a massive surplus as oil prices averaged a record $107 pb for the fiscal year. If, as we expect, spending comes in at 10-20% below the government’s forecast, then last year’s budget surplus could end up between KD 12.8 billion and KD 15.0 billion before allocations to the Reserve Fund for Future Generations (RFFG). By National Bank of Kuwait The projections for the current fiscal year 2013/14 are linked to our three scenarios, which yield oil prices within the narrow range of $94 to $100 pb. Preliminary budgeted spending for this fiscal year is set at KD 21.2 billion. Assuming that spending comes in at an improved 5-10% below budgeted expenditures, we project a surplus of between KD 8.1 billion and KD 11.2 billion before allocations to the RFFG. This would equate to 17%-23% of forecast 2013 GDP, and would represent Kuwait’s 15th successive budget surplus.
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