Kuwait revenue $20bn, $3.5bn surplus (page 2 of 2)

The range expected for KEC for 2003 falls between $21 and $28 per barrel, while the estimate for the fiscal year 2002/03 ending in March is around $26.

NBK's middle case scenario assumes a short and contained war in Iraq lasting a couple of weeks and little if any disruption in oil supplies. Following an initial modest release of US strategic stocks and an increase in OPEC production to reduce tight supplies and counter war disruptions in 2Q03, the organization would be expected to reduce output thereafter. In such a case, KEC is expected to average $29 during 1Q03.

Subsequently, prices should begin to soften in 2Q03 along with the seasonal drop in demand, and average between $20 and $25 a barrel for the rest of the year, and $23.8 for 2003 as a whole. This risk of war could be higher if Iraq or other events succeed in disrupting the flow of oil from the Gulf, or if the military campaign is prolonged.

The use of strategic reserves in OECD countries can make up for the shortfall, but oil prices would nevertheless stay high past the middle of the year. Though Brent is likely to stay above $30 most of the year, NBK did not consider this scenario for estimating KEC prices given the uncertainty concerning the country's oil exports under it.

The higher price scenario NBK considers is one where war continues to be delayed beyond the spring. Uncertainty in oil markets would continue to place a premium on oil prices until the threat of invasion subsides completely. OPEC would still be expected to hike production in 2Q03 to ease market tightness, before cutting back production later in the year. KEC would likely average $29.2 in 1Q03 before declining to under $27 later in the year and averaging $28.1 in 2003.

Though the 2003 demand growth forecast underlying the previous two scenarios is quite modest at 0.8%, even this could prove to be too optimistic. The possibility of still weaker demand during 2003 looms as economic recovery in industrial countries remains elusive. In such circumstances, and assuming the impact of the Iraq situation on the flow of oil from the region is contained, OPEC can be expected to implement bigger cuts in production. Faltering demand growth could depress prices in NBK's low case scenario to $16-$19 later in the year, with KEC averaging $21 in 2003.

Oil prices could also tumble even under the current demand picture. The release of substantial amounts of strategic stocks shortly after the war starts, possibly in April, could cause a sudden glut in oil and a collapse in prices if the war is short and conclusive. This is what OPEC is trying to avoid by reaming up production even as we approach a seasonally weak demand period in the second quarter.

NBK expects Kuwait export crude to average $26 during the 2002/03 fiscal year that ends in March. Budget revenues that totaled KD 5 billion over the first ten months of the fiscal year could top KD 6 billion by end March. This could be a record reported by Kuwait.

If actual expenditures are at budget with spending reaching KD 5.43 billion, the government budget would see a surplus of KD 638-657 million before appropriating 10% of revenues for the Reserve Fund for Future Generations (RFFG). However, we can expect spending to come in 8-10% under budget as it has done in the past. Consequently, we forecast a higher surplus in the range of KD 960-1,177 million.