14 July 2007
KUWAIT: In its latest economic brief on the oil market and budget developments, NBK commented on the recent strengthening in crude oil prices that brought them closer to the all-time high levels seen in the summer of 2006. Market tightness, which built up on both the supply and demand sides over the last quarter, combined with geopolitical tensions was evident in the record quarterly price increase of $10 in 2Q07.
Concerns over a possible interruption in oil supplies were first roused by Cyclone Gonu that hit the Omani coast and then moved in the direction of Iran. These concerns were later exacerbated by the news of a Turkish army incursion into Kurdish Iraq, followed by reports of a strike by Nigerian oil workers where 750,000 bpd were already shut in. Despite the coming and passing of all three incidents, no serious oil disruption was observed. However, upward revisions for global demand and statements by OPEC confirming its commitment to its current production levels maintained the pressure and prevented a downward price correction.
All the while, weak refinery runs and utilization figures in the US more than offset the bearish signals sent by comfortable crude stocks, still at their highest levels since May 1998. Brent hardly dipped below the $70 mark in June, and ended the month at $72.8, only to continue its climb toward $77 by the second week in July, its highest closing in 11 months. June's average of $71.3 was $3.8 higher than the previous month, and pushed the 2Q07 average to $68.8, some $10.7 (18 percent) higher than the previous quarter. Meanwhile, Kuwait Export Crude (KEC) mirrored Brent's movement, breaking through $67.9 in the second week of July, closing at its highest level in more than 11 months. The KEC average for June was $63.2, while the $61.8 average for 2Q07 was also $10 higher than in 1Q07.
NBK noted that the surge in oil prices in June can be partly attributed to stronger global oil demand growth compared with 2006, and some upward revisions in growth estimates for 2007. In its latest global oil demand outlook, the International Energy Agency (IEA) put growth in global oil demand for 2007 at 1.66 mbd or 2 percent above 2006. The IEA stated that new data for several key consuming countries and sustained growth in China were behind the upward revision. Meanwhile, the Centre for Global Energy Studies (CGES) remains much more conservative and expects a moderate 0.8 mbd (1 percent) growth over the year given the dampening effects on demand from continued substitution away from fuel oil and high prices of transport fuel. Notwithstanding the divergence of views over the 2007 outlook, both the IEA and CGES slightly revised upward their estimates for 2006 growth to 0.8 mbd from a previous forecast of 0.7 mbd.
Supply growth faces similar uncertainties and is playing a key role in driving prices to their prevailing high levels. On the crude front, OPEC had removed a substantial amount of its crude from the markets since last November and insists markets are well supplied, signaling that it has no intention to put an end to its output restraint. Non-OPEC supply growth could come to the rescue if enough new supplies hit the markets in 2H07, something OPEC strongly believes would come about. However, non-OPEC supply growth could turn disappointing as in previous years, leaving markets undersupplied. NBK cautions that until more crude comes from either side, crude tightness will continue to exert significant upward pressure on prices. OPEC estimates production by its ten effective member states averaged 26.4 mbd in May, down 57,000 bpd from April. A loss of 153,000 bpd in Nigerian output outweighed gains in most of the other members' production.
At the product level, markets are suffering tightness as well. While crude inventories have reached record high levels in the US, refinery utilization rates and refinery runs have hit new lows, highlighting refining system bottlenecks. The resulting low US gasoline inventories in June was just another factor driving prices higher.
Moderate growth in global demand of 1 percent in 2007, coupled with a slight drop in non-OPEC supply as envisaged by the CGES, would likely cause prices to continue to rise over the summer as OPEC output restrictions would lead to a counter-seasonal erosion of global inventories. Under such a scenario, the CGES sees Brent averaging $72 in 3Q07, easing back to $68 in 4Q07 before rising above $70 again in 1H08. Accordingly, KEC would average in our view $64.3 in 3Q07, $60.7 in 4Q07 and $59.6 for 2007 as a whole.
However, NBK indicates that demand growth could be twice as high as envisaged by the IEA (at 1.7 mbd) due to accelerating growth in the second half of the year, especially in the OECD and China. Combined with 0.86 mbd in incremental non-OPEC supply, this could send Brent as high as $78 in 3Q07. Further down the line, the outlook would depend on OPEC's reaction and willingness to produce more crude. A cautious approach with small quarterly increases starting in 4Q07 may cause a temporary respite in 4Q07, but risks being too little too late to prevent Brent prices from breaking new records in 2008 and head above $80. Such a scenario may yield a KEC average substantially higher than the first half of 2007, possibly hitting $69.3 in 3Q07 and $65.4 in 4Q07, and averaging $62.1 for the year as a whole. A price above $75 in 1Q08 may not be farfetched.
The previous view is clearly not shared by OPEC, which is more optimistic about non-OPEC supply growth reaching 1.14 mbd, while it expects oil demand to increase 1.3 mbd in 2007. This supply-demand combination would imply no need for OPEC to increase output beyond a mere 100,000 bpd to hold prices steady over the summer. This production level would still be 0.7 mbd lower than a year ago. Subsequently, we may even see a slight drop in prices with KEC averaging $57.5 in 2007, less than a $1 off its 2006 average.
With one quarter into the new fiscal year 2007/08, NBK sees the outlook for Kuwait's oil revenues to shaping up to be at least as good as FY06/07. Based on NBK's projections for the price of KEC that fall between $58.8 and $67.9 per barrel, versus a more conservative $36 in the official budget projections, oil revenues can be expected to reach KD 14.0-16.8 billion, to account for roughly 95 percent of budget revenues. Meanwhile, budget expenditures of KD 11.3 billion could actually be 5-8 percent lower, resulting in a surplus of KD 4.2-7.3 billion before the allocation of 10 percent of revenues to the RFFG. A middle case outcome with the oil prices at $63 would result in KD 16.4 billion in revenues and a surplus of KD 5.8 billion.
KUWAIT: In its latest economic brief on the oil market and budget developments, NBK commented on the recent strengthening in crude oil prices that brought them closer to the all-time high levels seen in the summer of 2006. Market tightness, which built up on both the supply and demand sides over the last quarter, combined with geopolitical tensions was evident in the record quarterly price increase of $10 in 2Q07.
Concerns over a possible interruption in oil supplies were first roused by Cyclone Gonu that hit the Omani coast and then moved in the direction of Iran. These concerns were later exacerbated by the news of a Turkish army incursion into Kurdish Iraq, followed by reports of a strike by Nigerian oil workers where 750,000 bpd were already shut in. Despite the coming and passing of all three incidents, no serious oil disruption was observed. However, upward revisions for global demand and statements by OPEC confirming its commitment to its current production levels maintained the pressure and prevented a downward price correction.
All the while, weak refinery runs and utilization figures in the US more than offset the bearish signals sent by comfortable crude stocks, still at their highest levels since May 1998. Brent hardly dipped below the $70 mark in June, and ended the month at $72.8, only to continue its climb toward $77 by the second week in July, its highest closing in 11 months. June's average of $71.3 was $3.8 higher than the previous month, and pushed the 2Q07 average to $68.8, some $10.7 (18 percent) higher than the previous quarter. Meanwhile, Kuwait Export Crude (KEC) mirrored Brent's movement, breaking through $67.9 in the second week of July, closing at its highest level in more than 11 months. The KEC average for June was $63.2, while the $61.8 average for 2Q07 was also $10 higher than in 1Q07.
NBK noted that the surge in oil prices in June can be partly attributed to stronger global oil demand growth compared with 2006, and some upward revisions in growth estimates for 2007. In its latest global oil demand outlook, the International Energy Agency (IEA) put growth in global oil demand for 2007 at 1.66 mbd or 2 percent above 2006. The IEA stated that new data for several key consuming countries and sustained growth in China were behind the upward revision. Meanwhile, the Centre for Global Energy Studies (CGES) remains much more conservative and expects a moderate 0.8 mbd (1 percent) growth over the year given the dampening effects on demand from continued substitution away from fuel oil and high prices of transport fuel. Notwithstanding the divergence of views over the 2007 outlook, both the IEA and CGES slightly revised upward their estimates for 2006 growth to 0.8 mbd from a previous forecast of 0.7 mbd.
Supply growth faces similar uncertainties and is playing a key role in driving prices to their prevailing high levels. On the crude front, OPEC had removed a substantial amount of its crude from the markets since last November and insists markets are well supplied, signaling that it has no intention to put an end to its output restraint. Non-OPEC supply growth could come to the rescue if enough new supplies hit the markets in 2H07, something OPEC strongly believes would come about. However, non-OPEC supply growth could turn disappointing as in previous years, leaving markets undersupplied. NBK cautions that until more crude comes from either side, crude tightness will continue to exert significant upward pressure on prices. OPEC estimates production by its ten effective member states averaged 26.4 mbd in May, down 57,000 bpd from April. A loss of 153,000 bpd in Nigerian output outweighed gains in most of the other members' production.
At the product level, markets are suffering tightness as well. While crude inventories have reached record high levels in the US, refinery utilization rates and refinery runs have hit new lows, highlighting refining system bottlenecks. The resulting low US gasoline inventories in June was just another factor driving prices higher.
Moderate growth in global demand of 1 percent in 2007, coupled with a slight drop in non-OPEC supply as envisaged by the CGES, would likely cause prices to continue to rise over the summer as OPEC output restrictions would lead to a counter-seasonal erosion of global inventories. Under such a scenario, the CGES sees Brent averaging $72 in 3Q07, easing back to $68 in 4Q07 before rising above $70 again in 1H08. Accordingly, KEC would average in our view $64.3 in 3Q07, $60.7 in 4Q07 and $59.6 for 2007 as a whole.
However, NBK indicates that demand growth could be twice as high as envisaged by the IEA (at 1.7 mbd) due to accelerating growth in the second half of the year, especially in the OECD and China. Combined with 0.86 mbd in incremental non-OPEC supply, this could send Brent as high as $78 in 3Q07. Further down the line, the outlook would depend on OPEC's reaction and willingness to produce more crude. A cautious approach with small quarterly increases starting in 4Q07 may cause a temporary respite in 4Q07, but risks being too little too late to prevent Brent prices from breaking new records in 2008 and head above $80. Such a scenario may yield a KEC average substantially higher than the first half of 2007, possibly hitting $69.3 in 3Q07 and $65.4 in 4Q07, and averaging $62.1 for the year as a whole. A price above $75 in 1Q08 may not be farfetched.
The previous view is clearly not shared by OPEC, which is more optimistic about non-OPEC supply growth reaching 1.14 mbd, while it expects oil demand to increase 1.3 mbd in 2007. This supply-demand combination would imply no need for OPEC to increase output beyond a mere 100,000 bpd to hold prices steady over the summer. This production level would still be 0.7 mbd lower than a year ago. Subsequently, we may even see a slight drop in prices with KEC averaging $57.5 in 2007, less than a $1 off its 2006 average.
With one quarter into the new fiscal year 2007/08, NBK sees the outlook for Kuwait's oil revenues to shaping up to be at least as good as FY06/07. Based on NBK's projections for the price of KEC that fall between $58.8 and $67.9 per barrel, versus a more conservative $36 in the official budget projections, oil revenues can be expected to reach KD 14.0-16.8 billion, to account for roughly 95 percent of budget revenues. Meanwhile, budget expenditures of KD 11.3 billion could actually be 5-8 percent lower, resulting in a surplus of KD 4.2-7.3 billion before the allocation of 10 percent of revenues to the RFFG. A middle case outcome with the oil prices at $63 would result in KD 16.4 billion in revenues and a surplus of KD 5.8 billion.
© Kuwait Times 2007
