In its latest economic brief on the oil market and budget developments, National Bank of Kuwait (NBK) reports that oil prices sustained their upward trend to set new records with Brent hitting $55.8 and WTI $56.7 by March 18, topping February’s averages by a range of $10 and $9, respectively. OPEC’s decision on March 16 to lift output quotas by half a million barrels per day (0.5 mbd) effective April 1st failed to abate concerns driving the market, as it rather served to legitimize prevailing overproduction by member countries. Even with OPEC hinting that an equal rise in actual production will follow if need be, prices remained supported by stronger Chinese demand, cold weather in Europe and Japan, tight refining capacity worldwide, and an unexpected reduction in US inventories ahead of the stock-building season.
During March, Kuwait export crude (KEC) climbed steadily to new record highs, approaching $45 per barrel by the third week and averaging $43.24 for the month-to-date, or some $6.0 above its February average. Spreads between KEC and the lighter crude benchmarks widened again to average $9.9 against Brent and $11.3 against WTI, compared with an average of $8.1 and $10.5 in February.
Forecasts of growth in global oil demand during 2005 have been adjusted upwards repeatedly over the past three months, with the Centre for Global Energy Studies (CGES) and International Energy Agency (IEA) recently raising their estimates to 2.2%, while expecting further growth throughout the year.
OPEC’s crude production averaged 29.560 mbd in February, a 1.4% increase from January levels. Excluding Iraq, production by the ten effective OPEC members (OPEC-10) reached 27.690 mbd compared with 27.350 mbd in January. The largest increases came from Saudi Arabia (0.170 mbd) and Kuwait (0.090 mbd).
OPEC’s decision to raise its production ceiling to 27.5 mbd was founded on expectations of continued demand strength, slower growth in non-OPEC supply, and persisting US refining constraints that could make it difficult to meet demand in the summer driving season. Thus, by allowing stocks to build ahead of summer, OPEC hopes to forestall a repeat of last summer and further spikes in prices. Indeed, the organization indicated its readiness to increase output by a further 0.5 mbd ahead of its next meeting on June 15, should price pressures continue.
NBK reports that meanwhile, Saudi Arabia has already set its March production level at 9.5 mbd compared with 9.22 mbd in February. The Kingdom also aims to pump 9.8 mbd during the third quarter and up to 10 mbd by the fourth quarter of the year, knowing that its output capacity is currently estimated at 11 mbd with plans to raise it to 12.5 mbd by 2008.
Given the current estimate for demand growth, if OPEC’s output rises to 29.9 mbd and remains stable at that level through 2Q05 at a time when consumption sees a seasonal drop, the small build-up in stocks will help prices retreat from their current highs and remain stable for much of the year. Under this scenario, NBK expects KEC to retreat from an average of $38.6 in 1Q05 to an average of $36.3 for the remainder of the year.
Should oil demand growth prove to be a stronger 2.5% in the second half, OPEC would need to raise its output further to 30 mbd as early as 2Q05 in order to prevent prices from breaking new highs. Though KEC may moderate to an average of $37.3 during 2Q05, it is likely to resume its upward trend in summer to reach $43.1 by 4Q05, averaging $39.4 for the year as a whole, according to NBK. However, disruptions in output from other producers may still push prices to higher levels.
On the flip side, there still remains the possibility that expensive energy may undermine economic growth in Asia, causing oil prices to drop in 2H05. In this case, OPEC may choose to match the drop in demand by cutting its output in 3Q05 to prevent its basket price from falling below $40. Under this scenario, NBK expects KEC to fall below $35 by 3Q05 before rising again to an average of $37.4 in 4Q05.
NBK’s economic brief mentions that whichever of the above scenarios prevails, Kuwait’s budget is set to reap a sizeable surplus in the current and coming fiscal years. With KEC expected to average around $35 in FY04/05 and range between $35.2 and $40.3 in FY05/06, NBK expects budget revenues to hit KD 8.85 billion and KD 8.78-10.44 billion in these periods, respectively, assuming output remains between 2.35 mbd and 2.45 mbd. If budget expenditures come at roughly 95% of planned as per NBK’s estimates, Kuwait would see a surplus before the allocation of 10% of revenues to the Reserve Fund for Future Generations (RFFG), of KD 2.7 billion in both fiscal years, with the possibility of rising to KD 3.8 billion in the high-case scenario for FY05/06.
