Oil prices have eased back through October and early November, with some benchmarks reaching 5-month lows. The price of Kuwait Export Crude (KEC) slipped from $107 per barrel (pb) in mid- October to $101 in the first week of November, its lowest since early July. Brent crude prices followed a similar pattern, falling from $112 in early October to under $103 – some $14 below its end-August peak. The price of the main US benchmark – West Texas Intermediate (WTI) – witnessed larger declines, falling by more than $16 from its early September peak of $111. WTI prices fell below $100 pb for the first time in more than 3 months. Accordingly, WTI’s discount to Brent widened from $1 in mid-July to as high as $12 in late October.
An easing of tensions in the Middle East has contributed to recent price declines. Negotiations between the West and Iran surrounding the latter’s nuclear program have reduced the political factors that have elevated oil prices this year. This follows the US backing-off from military intervention in Syria in the previous month. Western sanctions have taken an estimated 1 million barrels per day (mbpd) of Iranian crude off the oil market, and oil prices have reacted to the prospects of an easing of these sanctions.
Rising crude inventories in the US have also added to downward pressure on prices. Weakening demand from US refineries – due to seasonal maintenance – and rising US oil production have led to a rapid climb in crude stockpiles. This also explains why WTI prices have fallen more sharply than other benchmark crudes in recent weeks. Strong global oil supplies have also helped maintain downward pressure on prices. Non-OPEC supplies have continued to surge, while elevated production levels in the GCC have partly offset supply disruptions in other OPEC countries. OPEC members, scheduled to meet in Vienna on December 4th, are expected to keep the organization’s output target at 30 mbpd – slightly below the current production level.
Oil demand outlook
Analysts’ forecasts for global oil demand growth this year have converged over the past month towards a slightly improved outlook, with a marginal acceleration in 2014.
The International Energy Agency (IEA) now sees demand growing by 1 million barrels per day (mbpd), or 1.1 percent, this year from 0.9 mbpd (1.0 percent) last month – in line with the forecasts of the Center for Global Energy Studies. This mostly reflects better-than-expected economic data for 3Q 2013. For 2014, the consensus view for global oil demand growth remains unchanged at 1.1 mbpd (1.2 percent), consisting of a 0.3 mbpd fall in demand from developed countries and a 1.4 mbpd rise in demand from developing countries. Taken together, China and the Middle East account for more than half of the increase in demand for the world as a whole.
Oil supply outlook
Crude output of the OPEC-11 (excluding Iraq) fell by a significant 494,000 bpd to 28.6 mbpd in September, according to data provided by ‘direct communication’ between OPEC and national sources. Major declines were witnessed in sanction-constrained Iran (200,000 bpd), Libya (190,000 bpd) and Nigeria (144,000 bpd). Libyan production continues to be curtailed by ongoing labor disputes and the subsequent shut down of fields and ports. Output fell to 0.4 mbpd – more than 1 mbpd below the post-war high reached in October of last year. Saudi Arabian production was also down by 67,000 bpd in September, though output was maintained at above 10 mbpd for the third consecutive month – partly related to the start-up of the new Jubail refinery.
The largest decline in OPEC came from Iraq, which pushed down the organization’s total output to its lowest level in almost two years. Iraqi production fell 374,000 bpd to an 18-month low of 2.8 mbpd in September. The drop was due to maintenance works at southern ports, which are likely to have continued through mid-October, in addition to forced production cuts at major fields following a leak in a key oil pipeline.
Non-OPEC oil supplies are projected to increase by a significant 1.5 mbpd for 2013 as a whole, of which one-quarter is due to come from OPEC natural gas liquids. Non-OPEC supply growth has come from North America, the Former Soviet Union and Africa – the latter related to the ramp-up of output from South Sudan. If OPEC output remains at current levels, OPEC output is on track to fall on average this year and global supplies should increase by less than 1 mbpd. Next year, global supplies could rise more significantly on the back of even stronger growth in non-OPEC output.
Price projections
Despite an improving demand outlook in 2014, large increases in non-OPEC output could cause supply to exceed demand again, forcing OPEC to cut production in order to keep prices above $100 pb. Using the consensus forecast of a 1.1 mbpd increase in global oil demand in 2014 and a large 1.7 mbpd increase in non-OPEC supplies, global inventories could rise by 0.5 mbpd.
Despite OPEC production cuts in early 2014, the price of KEC would gradually slip from $106 in 4Q 2013 to $100 by end of 2014. If, on the other hand, the rise in non-OPEC supplies turns out 0.3 mbpd stronger than expected next year, then inventories could rise by a larger 0.8 mbpd and prices could be set on a steep downward path. In this case, the price of KEC declines to under $100 by mid-2014 and below $90 by end-year. Alternatively, a 0.3 mbpd shortfall in non-OPEC supply growth next year – possibly from slower-than expected growth in North American production – could see oil prices rise sharply.
In this scenario, the price of KEC accelerates from under $110 in the second half to above $120 by end of 2014. These last two scenarios would likely prompt OPEC to adjust its output in order to prevent prices moving too far in either direction.
Budget projections
The three scenarios above generate oil prices in the narrow range of $103 to $105 in the current fiscal year, with the impact on prices largely felt next year. Although oil prices may average lower than last year’s $107, higher production is expected to keep government revenues flat or slightly above the previous year. If government spending, as expected, comes in 5-10 percent below its official target of KD 21.0 billion, the budget would see a surplus of between KD 12.0 billion and KD 13.6 billion before allocations to the RFFG. This would equate to 24 percent-27 percent of forecast 2013 GDP, and would represent Kuwait’s 15th consecutive budget surplus.
NBK Economic Report
29 November
