Kuwait budget surplus likely

In its latest economic brief on the oil market and budgetary developments, National Bank of Kuwait reports that April saw Kuwait export crude rise to $24.3 per barrel, a $1.55 increase from the previous month.

The price increased further during May to average $24.5, though some softening was observed towards the end of the month. Crude oil prices strengthened largely on speculation of a possible US attack on Iraq and expectations of a US lead recovery in demand for crude. However, continuing uncertainty about the strength of the US economy was behind the current softness in prices.

According to the NBK report, demand for crude oil was exceptionally weak during the first quarter of the year, coming well below expectations in OECD countries. This has been attributed largely to a warmer winter and to a lag in the impact of the economic recovery on oil markets. As a result, a smaller than expected decline in oil inventories was observed. While a 600,000 barrel drop is typical for the first quarter, during 1Q02 inventories fell by only 200,000 barrels.

Despite the unanticipated weakness in demand during 1Q02, the International Energy Agency did not make any changes to its full year demand projection expecting that US economic recovery already underway will underpin stronger demand growth in the second half of 2002. Such a scenario does have its critics, including OPEC, who see the poor demand results in 1Q02 as indicative of generally weaker demand during 2002 as a whole.

This view may very well lead to OPEC delaying any hike in output until clear evidence of a recovery in demand growth is visible.
NBK reports that the ten OPEC member countries bound by the organization's current quota of 21.7 million barrels per day (mbd) saw production unchanged in April at 22.9 mbd, 5.5% higher than the ceiling. This is among the organization's highest levels of over-production.

In fact, over-production during the first four months of 2002 has been particularly high at 5.2%. Over-production averaged 2.9% and 2.1% in 2000 and 2001, respectively. On the other hand, Iraq's decision to halt crude oil exports for 30 days reduced its production by 1.2 mbd during April. Though this did not seem to have any immediate impact on the market, it is expected to contribute to a tighter overall market later in the year as demand growth picks up.

According to NBK's estimates KEC price is expected to average $23.4 per barrel during 2Q02, up from $19.9 in 1Q02. The outlook for the second half obviously depends on the timing of OPEC's decision to reverse its output cuts. In a scenario where OPEC boosts its production quotas by 1 mbd starting July in anticipation of a recovery in demand in the second half, KEC should remain near $23.9 during 3Q02 before weakening slightly in 4Q02.

The average for 2002 would be $22.4. However, if OPEC decides to delay an increase in its production ceiling until October, which is the more likely scenario at present, KEC is likely to average a higher $25.7 in 3Q02 and reach $27.5 in 4Q02. KEC would average $24.4 in 2002.

The NBK report explains that a less likely scenario would arise if demand growth fails to materialize later in the year. If this is accompanied by an OPEC hike in production starting in July, KEC could see declining levels. In this case, the price would weaken considerably in 4Q02 dropping to $18.1 and to $14 in 1Q03. In this event, the average for 2002 would be $20.4.

However, if weak demand growth is anticipated by OPEC and is met with a delayed October hike in production, prices would maintain their strength similar to the base case scenario.

The NBK adds that the draft budget for fiscal year 02/03 awaiting parliamentary approval projects a record budget deficit of KD 1.89 billion before the allocation to the Reserve Fund for Future Generations (RFFG). However, KEC is expected to average $19.5-$25.5, well above the budget's assumed price of $15.

The higher oil revenues would thus result in a smaller budget deficit ranging between KD 153 million and KD 1.33 billion. It is also very likely that the government's actual spending will be 8%-12% below the KD 5.43 billion projected in the draft budget. This would put the budget between a KD 673 million deficit and a KD 282 million surplus.