Kuwait could see a KD6 bn budget surplus in FY10/11…

  Crude prices fall on global financial turmoil... Kuwait could see a KD6 bn budget surplus in FY10/11…
NBK’s latest Oil brief stated: Crude oil prices fell sharply in May, posting their biggest correction since the crash of 2008. The price of Kuwait Export Crude (KEC) fell some USD 18 from a peak of USD 84.3 per barrel (pb) in early May to a low of USD 66.0 pb on May 26th, its lowest since September last year. Some of these losses were quickly reversed, however, with the price bouncing back above USD 70 by the end of the month.
The catalyst for the fall was intensifying fears over the escalating debt burden of various governments – especially in Europe – and the associated risks of both economic relapse and financial turmoil. Such fears also helped generate a sharp rise in the US dollar – a traditional safe haven. The trade-weighted dollar index leapt 4% in the first three weeks of May to its highest level in ten months. A rising dollar tends to put downward pressure on crude prices.
This crisis atmosphere played out alongside growing concern about the impact of the oil spill at BP’s Deepwater Horizon operations in the Gulf of Mexico. Although estimates of the size of the spill differ greatly, the US government puts the volume of leaking oil at 12,000-19,000 barrels per day (bpd). While the immediate focus of attention is on the calamitous environmental fallout of the spill – which it is now thought could last until August - some observers have identified the crisis as a potential obstacle for plans to expand US offshore drilling operations.
So far, the impact of the oil spill has been felt more on BP’s share price – which has fallen by one-quarter - than on crude oil prices, probably because the quantities of oil lost are relatively small. The price of West Texas Intermediate (WTI) crude fell by even more than KEC in May – a peak-to-trough drop of USD 21 – while the year-end 2012 futures contract price fell by USD 18 to USD 58 pb.
Analysts continue to tweak their forecasts for 2010 global oil demand growth, though most agree that this year will see a solid increase. The Centre for Global Energy Studies (CGES) has revised up its forecast for demand growth by 0.2 mbpd, to a strong 1.8 mbpd (2.1%). It brushed off the impact of the European debt crisis on the global economy (though acknowledging the rising risk of a further slump). The International Energy Agency (IEA), meanwhile, sees oil demand growth of 1.6 mbpd, slightly lower than last month, owing to their adoption of a higher oil price assumption. Although not extreme, these figures are at the stronger end of forecasts. OPEC, for example, expects more sedate growth of 1 mbpd this year, thanks to what it sees as vulnerabilities relating to the withdrawal of government stimulus packages. As in previous months, non-OECD countries are expected to account for most of – if not all - the increase in demand.
Crude output of the OPEC-11 (i.e. excluding Iraq) continued its steady rise in April, increasing by 58,000 bpd on the month, to 26.905 mbpd. Overall production stands nearly 2.1 mbpd above its official quota levels. Both Nigeria and Iran – already producing well in excess of their official targets - saw month-on-month increases of around 25,000 bpd. Although OPEC representatives played down the sharp May fall in prices, the drop may move the cartel to try and restrain any further creeping production increases. For now at least, officials have declared that the organization has no plans to discuss output levels before the next scheduled gathering in October. If it remains at current levels, OPEC crude output should average around 0.6 mbpd higher this year than in 2009.
Although both the demand and supply of oil are expected to see decent sized gains this year, there remain considerable risks on both sides. On the demand side, problems in the Euro zone could – even without a ‘double dip’ recession – generate enough uncertainty to significantly downgrade global demand. There are also concerns about the possibility of an abrupt slowdown in Chinese economic growth, which could be of even greater significance for oil prices. On the supply side, meanwhile, the main risk could be that the solid increases expected in both non-OPEC crude (+0.6 mbpd) and OPEC natural gas liquids (+0.6 mbpd) disappoint, as they have sometimes done in the past.
Assuming that neither of these events occurs, increases in demand and supply – at around 1.8 mbpd - may turn out to be broadly offsetting, implying no great changes in market fundamentals for the year as a whole. In that case, prices might remain more or less range bound, at between USD 70-75 pb, dipping slightly in 2H10 as the big year-on-year gains in demand fall away. The price of KEC would average USD75 for FY2010/11.
Under a softer global economy scenario, demand growth could come in some 0.3 mbpd lower than expected, at 1.5 mbpd. Unless OPEC withdraws some supplies from the market, prices would tumble to below USD 60 pb at the end of this year – and perhaps lower still in 1Q11. For FY2010/11 as a whole, they average USD 64.
But should the anticipated sizeable increase in non-OPEC oil supply fail to materialise – leaving output 0.2 mbpd lower - crude prices would quickly recover from their recent stumble and push on towards the USD 90 pb mark by early next year. The price of KEC would average USD 84 pb in FY2010/11.
The NBK report concluded: While the government’s spending plans have not yet been finalized, the above scenarios could yield the Kuwaiti government another large fiscal surplus this fiscal year. Total revenues would be between 15% lower and 16% higher than our estimates for FY2009/10. Public spending, on the other hand, could rise by between 26-48% this year, partly due to big increases in spending under the 5-year development plan and partly due to a large transfer to the Public Institute for Social Security. Based upon these assumptions, the government’s budget position for FY2010/11 would end-up between balance and a surplus of KD 6.3 billion. This comes on top of what may have been a KD 7 billion surplus in FY2009/10 (official figures are not yet available).