Global Investment House – Kuwait – World Oil Sector Review - The recent turmoil in the global financial market has not only shaken the equity markets but has also made a significant impact on the commodity markets. However, the world’s crude oil market is the most affected, prices have fallen by 66.1% from a peak level of US$140.7per barrel in July 2008. Consequently, this creates a major threats for the oil exporting countries i.e. OPEC and GCC countries, where majority of the revenues are based on crude oil export.
In order to counter the declining prices of crude oil, the OPEC member countries particularly, the members of GCC and Iran & Venezuela are stressing to cut their oil production from 2007 levels of 27.4mn barrels of oil per day (bopd). It is worth mentioning that the world leading oil producers have cut almost 5% of their production, which has led to a decline of 1.6% in world crude oil production, in 2009.
Going forward, in 2009, we expect the GCC member to further cut the oil production by 5% on an average basis, which will lead to widen the demand supply gap from 1,028.3mn barrels in 2008 to 1,857.6mn barrels. As a result, we forecast the average prices for the next year to settle in the range of US$70.0 to US$76.8 per barrel, showing 71.8% increase in the current crude oil price of US$47.7per barrel on 13th November 2008. However, the expected average prices for 2009 are 23.8% lower than the average prices registered in 2008. Based on the current world economic situation, slowdown in large scale manufacturing activities, lowering crude oil prices and production cuts will make the year 2009, a challenging year for the regional economies.
In addition, the supply of Kuwait is expected to relax down by 5.0% in 2009 at 2.0mn bopd from the existing level of 2.1mn bopd. Moreover, the expected decline is also inline with the expected production cut of 5.0% from OPEC member countries in 2009. However, the demand of refined crude oil, within the country, is expected to reach 0.3mn bopd in 2009, an increase of 9.5% over the demand of 2007. Somehow, this will help the country to overcome the expected slow down on the global front.
The Middle East has the biggest advantage of low cost of oil extraction as compared to the other parts of the world. Based on the Energy Information Agency (EIA), the Middle East region is producing oil at the lowest per barrel cost of US$5.3 as compared to US$7.6 in North American region has the lowest cost per barrel. Moreover, Kuwait, Saudi Arabia, Iran and Iraq are producing crude oil at the least cost per barrel of US$2.5, US$2.0, US$1.5 and US$1.5 respectively, while the per barrel cost in Canada and US is US$8.3 and US$6.8 respectively. Consequently, this provide a competitive edge for these regional countries in two ways (i) to carry out its drilling with higher margins and (ii) give space to continue the important projects despite of low crude oil.
Chart 01: Cost Per Barrel (US$)
Source: EIA & Global Research
World Crude Oil Production
Over the last seven years, 2000-07, crude oil production has increased at a CAGR of 1.2%. However, interestingly, the production from African region has increased at a highest CAGR of 4.1% during 2000-07, followed by Europe and the Eurasia region, which has recorded the increase at a CAGR of 4.1% followed by OPEC members’ production CAGR of 2.1%. Among the countries, Azerbaijan has recorded 2000-07 production CAGR of 17.4% followed by Sudan, where production has increased at a CAGR of 14.8%. In addition, other major increase was registered in Kazakhstan, Qatar and Brazil, where the crude oil production has increased at a CAGR 10.4%, 6.8% and 5.4% respectively.
Table 01: Crude Oil Production (mn barrels)
2002 2003 2004 2005 2006 2007
United States 2,783.5 2,701.0 3,175.6 3,037.5 3,037.5 3,037.5
Other OECD 4,986.9 4,979.1 5,150.2 4,949.5 4,949.5 4,949.5
Total OECD 7,770.4 7,680.1 8,325.8 7,987.0 7,987.0 7,987.0
OPEC 9,090.9 10,151.0 10,674.7 11,151.1 11,225.0 11,113.1
Former U.S.S.R. 2,809.8 3,118.6 3,389.8 3,486.5 3,565.8 3,642.0
Other Non-OECD 7,513.5 7,166.5 6,928.6 7,033.7 7,027.7 7,017.4
Total Non- OECD 19,414.2 20,436.2 20,993.1 21,671.3 21,818.5 21,772.5
Total World Supply 27,184.6 28,116.3 29,318.8 29,658.2 29,805.5 29,759.5
Source: BP Statistical Review 2008
Energy Information Administration (EIA) Cut its Production Forecast
According to the Energy Information Administration (EIA), has revised down its estimated production assumptions to 31.2mn bopd for OPEC. The combined production of OPEC member’s has claimed 37.3% of the overall world crude oil production in 2007. The downward revision in OPEC member countries by EIA is mainly due to the recent global financial jolt, which has brought down the demand of crude oil in international markets and causing major oil producers to cut their production, in order to stabilize the falling prices of crude oil. Recently, the OPEC members called an emergency meeting, in October 2008, and have decided to slash their production by 5.0%, which is expected to bring down the regional production growth at 2.5%, on average basis, from previous estimate of 2008. However, the OPEC members are also planning to revisit their adjusted production but the date of meeting has not been announced. The recent downward revision made by EIA because of slowdown in world economic activities will lead us to downward our expected world production from 31.6bn barrels to 30.0bn barrels in 2009.
Going forward, in 2009, we expect the oil production from OPEC member countries to show a reduction of 24.0% from the production level in 2007, which is mainly based on (i) the recent production cut of 5.0% and (ii) the forecasted production cut another 5.0% during 2009. It is noted that there are some limitations in order to make production cuts, which are (i) higher abandoning costs of field, (ii) the producing fields or wells are less flexible to make big cut in the production and (iii) difficulty in stopping the invested capital in new field or well.
Chart 02: Forecasted World Crude Oil Production (bn barrels)
Source: BP Statistical Review 2008 & Global Research
Being an OPEC member and major supplier of crude oil, Kuwait has halted its oil production from the start of November 2008, which results the in a decline of production from 2.6mn bopd in 2007 to 2.1mn bopd 2008. However, the production from the country is expected to lower down further with the expected production cut of 5.0% in 2009.
Chart 03: Forecasted Crude Oil Production in Kuwait (mn barrels)
Source: BP Statistical Review 2008 & Global Research
Crude Oil Demand / Consumption
The crude oil demand / consumption is mainly associated with the demand of refined petroleum products. According to BP statistical review, the world’s refining capacity has reached 31.5bn barrels of oil in 2007, while the global demand of refined products was standing at 31.1bn barrels of oil, during the same year. Over the period of last seven years, the demand of refined petroleum products in OPEC member countries has registered the highest increase at a CAGR of 4.1% followed by non-OECD. The major reasons of increase in the demand of petroleum products are (i) establishment of oil-based industries in Middle East and (ii) expansion and development in industrial sector, which increase the electricity demand, in Asian region. Moreover, the demand of refined crude oil in the State of Qatar has increased at a highest CAGR of 13.4%, during 2000-07.
Table 02: Crude Oil Demand / Consumption (Mn barrels)
2002 2003 2004 2005 2006 2007
United States 7,212.7 7,312.1 7,566.7 7,592.8 7,550.9 7,554.6
Other OECD 9,610.9 9,733.6 9,759.5 9,842.6 9,816.5 9,670.3
Total OECD 16,823.6 17,045.7 17,326.2 17,435.4 17,367.4 17,224.9
OPEC 1,514.55 1,577.04 1,653.99 1,723.50 1,793.98 1,892.40
Former U.S.S.R. 951.1 957.0 955.8 949.5 988.7 985.2
Other Non-OECD 9,118.5 9,363.3 10,034.6 10,302.4 10,593.9 11,002.7
Total World Consumption 28,407.7 28,943.0 29,970.6 30,410.8 30,743.9 31,105.1
Source: BP Statistical Review 2008
Energy Information Administration (EIA) Assume Consumption to Remain At Same Level For 2009
EIA expect that the oil consumption will remain flat during 2009. However, EIA forecasts an increase in consumption in non-OECD while a decline in OECD countries. Recently, the International Monetary Fund (IMF) has cut the world economic growth forecast by 0.2%, which has led us to revise down our expected global oil consumption from 32.1bn barrels in 2009 to 31.9bn barrels. Based on our forecast, we expect the demand of refined crude oil to remain stable in US, while Middle East region is expected to post a higher demand CAGR of 4.7%, during 2007-09, which is mainly due to increase in petrochemical production capacities. Moreover, based on our expectations, we expect the global demand will not show a massive decline of more than 5.0%, in any given period, because of increase in basic demand of refined oil products to run the industries, transport sector and generate electricity.
Chart 04: Forecasted World Crude Oil Consumption (bn barrels)
Source: BP Statistical Review 2008 & Global Research
Regardless of expected decline in the crude oil production, we expect the consumption in Kuwait will increase at a CAGR of 4.7% during 2007-09. The expected increase in production from Kuwait is mainly based on the (i) expansion in oil-based industries, (ii) expansion in transportation sector and (iii) increase in the demand of electricity.
Chart 05: Forecasted Crude Oil Consumption in Kuwait (mn barrels)
Source: BP Statistical Review 2008 & Global Research
Crude Oil Prices
Over the period of the last 6 years, the basket price of OPEC crude oil has surged by 192.5% from US$23.01 per barrel in 2002 to US$67.31 per barrel in 2007. The increase in crude oil prices over the period of 5 years were mainly due to the following reasons:
•Global political uncertainty
•High global economic growth
•Lack of refining capacity which caused a shortage of refined products.
The average basket prices of OPEC crude oil prices are recorded at US$113.5 per barrel, in 3Q2008. The recent upward rally in the price of crude oil, which was begun in the 4Q2007, has ended during the 3Q2008, which is mainly due to the ongoing global financial crisis. Going forward, we expect crude oil prices to ease down from the current level (3Q2008) to US$65.0-70.0 per barrel in 2011. This assumption is based on the following factors:
• Slowdown in economic development and shifting towards gas base industries.
• New refining capacity will come online by 2011, which will fulfill the shortage of refined products.
However, oil prices are expected to range in between the levels of US$70-76.8 per barrel in 2009 as compared to the current level of US$47.7 per barrel, on 13th November 2008. The expected increase in crude oil prices in mainly due to the following factors:
•Recovery of the financial market from the ongoing financial crisis.
•The financial crisis increases the risk the world’s production growth slower than the expected demand, which will widen demand-supply gap from 3.3% in 2008, to 5.8% in 2009.
Moreover, International Energy Administration (IEA) expects a rebound in crude oil prices and average at the level of US$100 per barrel by 2015. This estimation of rebound in crude oil price is based on the expected supply crunch due to the depleting of mature oil fields.
