Kuwait budget surplus could reach KD 6 bn in FY2009/10…
Amongst these were encouraging signs from various macro-level indicators, including September Chinese (+13.9% y/y) and Indian (+10.4%) industrial production, more upbeat purchasing manager indices from around the world and stronger-than-expected corporate earnings in 3Q09, especially in the US. All of these seem to support the case for a reasonably strong rebound in global oil demand.
The prices of other major global benchmark crude prices also appeared to move into a new range of $70-80 pb rather than the $60-70 seen since June. The prices of Brent and West Texas Intermediate (WTI) ended October at $74.0 and $77.0, respectively, with the latter even rising above the $80 pb mark late in the month as dollar pessimism peaked. Despite this surge, the WTI benchmark received a blow in late October when Saudi oil major Aramco announced that it would no longer use it as a reference for pricing Saudi oil sales into the US, citing distortions that have left WTI prices unrepresentative of broader market conditions on occasion over the past few years. From January 2010, a new blend of sour US Gulf coast crudes will be used instead. The move appeared to have little immediate impact on WTI contract prices, however.
As confidence in the short-term, NBK noted that economic situation has solidified; analysts have continued to revise up their forecasts for global oil demand, albeit from very low levels. In October, for example, the International Energy Agency (IEA) revised up its projections for growth in oil demand in 2010 by 0.15 million barrels per day (mbpd) to 1.4 mbpd (1.7%). It also expects the fall in demand in 2009, at 1.7 mbpd (1.9%) to be 0.2 mbpd less severe than previously thought. These upgrades were driven by more optimistic forecasts for world economic growth by the International Monetary Fund (3%), from which the IEA takes its lead. While analysts’ disagreements over demand in 2009 have narrowed, the IEA’s forecast for 2010 is still strikingly bullish compared to others in the market. Both OPEC and the Centre for Global Energy Studies (CGES), for example, see oil demand rising by just 0.7 - 0.8 mbpd next year. The disagreement is over the strength of oil demand growth in emerging markets. Demand in the OECD is expected to be flat-to-falling.
NBK added that, on the supply side, OPEC-11 (i.e. excluding Iraq) output increased for the sixth month in a row between August and September, by 72,000 bpd, and is now 675,000 bpd higher than at its trough in March. Compliance with OPEC’s target of reducing crude production by 4.2 mbpd from September 2008 levels has slipped to 63% from a peak of 79% in March. With crude prices rebounding towards $80 pb, there is little incentive for producers to restrict production any further at this stage. Indeed, recent speculation has focused upon whether the cartel will raise output quotas at its next meeting in December. But with output already above target, such a ‘cosmetic’ move might not affect market fundamentals very much. Moreover, even if the global economy continues to recover, a number of downside risks to oil prices remain, including a strengthening dollar, rising OPEC spare capacity, increasing non-OPEC output (particularly from Russia) and still high crude inventory levels. In such an environment, OPEC is likely to remain cautious in announcing any gear change in policy.
Assuming that OPEC leaves production close to its current levels over the next six months, the short-term prospects for oil market fundamentals will rest upon the speed of improvement in demand and/or changes in non-OPEC production. Going into the Northern hemisphere winter, these two factors could be more or less offsetting with rising seasonal demand for oil (+0.7 mbpd between 3Q09 and 1Q10) met by higher non-OPEC supply. This scenario might keep crude prices more or less at 3Q09 levels into 1Q10 – close to $70 pb. The price of KEC averages $65.7 for FY2009/10 as a whole.
A faster than expected world economic recovery – perhaps of the sort envisaged by the IEA - would raise the demand for oil in 2010. But in practice, this is unlikely to be felt until the spring when the traditional winter boost to demand has faded, so the short-term impact on crude prices might be modest. Assuming that OPEC leaves its output unchanged, the price of KEC could climb up towards $75 pb in 1Q10, but strengthen even further into the next fiscal year.
A downside risk to prices, on the other hand, could emerge if (as assumed by the IEA) non-OPEC production were to turn out stronger than expected – perhaps ending up 0.3 mbpd higher than previously expected in 1Q10. But again, the impact would mostly be felt in the post-winter period. Under this scenario, the price of KEC slips slightly to $66 pb in 1Q10. In the absence of further production cuts from OPEC, prices could fall towards $40 pb by the end of 2010.
In all three of these scenarios, the price of KEC averages between $65 and $68 pb for FY2009/10 as a whole, a much better outcome than the $35 pb assumed by the government in its budget. Indeed, the latest official data shows that budget revenues in the first half of FY2009/10, at KD8.2 billion, have already exceeded what the government had originally projected for the entire year. If, as expected, public expenditures come in at 5-10% below budget, we estimate that the government will run a budget surplus of between KD 4.7 and 6.4 billion, before allocating 10% of revenues to the Reserve Fund for Future Generations (RFFG). On our own forecasts, this surplus – which could be the third largest ever in absolute terms – would equate to between 17% and 23% of 2009 GDP.