Kuwait revenue $20bn, $3.5bn surplus (page 1 of 2)

In its latest economic brief on the oil market and budgetary developments, National Bank of Kuwait reports that geopolitical developments have pushed the price of Kuwait export crude (KEC) above $30 a barrel since mid February, putting it almost 40% above its lows in November 2002.

The surge in oil prices that started in December was fuelled initially by disruptions in Venezuelan oil exports, but gained added momentum on rising concerns over the inevitability of war in Iraq.

Uncertainty has been the biggest factor in the recent run up in oil prices. Increased likelihood of a US-led attack on Iraq by early spring at the latest has heightened fears of a substantial disruption in the Gulf region's oil exports, bringing back a war premium to oil prices.

In addition to losing Iraqi crude in the event of a war, the markets have been reacting to the small likelihood that other suppliers in the Middle East, primarily Kuwait, could also be affected, at least temporarily.

Still, the rise in oil prices has as much to do with supply fundamentals as it has to with the increased uncertainty in the region. Despite OPEC's surge in production following its decision to hike output targets in January, the market has tightened substantially thus far in 2003. The main factor behind this has been the loss of much of Venezuela's crude supply on which the US market relies heavily.

Time lags involved in replacing this short-haul crude with long-haul Middle Eastern crudes has caused US stocks to drop to their lowest levels in two decades. Tight conditions are expected to continue despite the gradual restoration of Venezuelan crude production during February. The latter is expected to take some time before reaching pre-strike levels again.

NBK states that increased demand has also been an added factor boosting the price of oil. Winter demand has been stronger than expected due to colder than usual weather in the US and to increased fuel consumption in Japan's power sector as the country faces some problems with its nuclear power plants. This has added strength to an already improved demand growth picture for 2003 relative to 2002.

The International Energy Agency (IEA) expects growth to reach 1.43%, versus 0.52% last year. However, continued high prices could put a damper on these expectations.

The Centre for Global Energy Studies (CGES) estimates that the increase in OPEC production suggests a global stock build of 1 mbd in 1Q03. However, much of the additional oil is still at sea or in producer-controlled storage, with little impact on US inventories that are close to their operational minimum. CGES expects some of this additional oil to arrive at the US in the second half of March, which should ease prices.

Excluding Iraq, the supply picture is expected to improve further in spring. OPEC producers are expected to continue boosting their production in anticipation of a disruption in Iraqi exports and to give assurances to markets and consumer governments of its ability to meet demand in the hope of dissuading them from releasing strategic stocks.

Kuwait has been trying to set aside concerns about its production capacity by announcing that actual production is running at full capacity of 2.4 million barrels per day (mbd) despite the fact that it shutdown production in its northern-most fields, with production of around 0.1 mbd.

The NBK reports that prices are expected to remain volatile this year with a multitude of possible scenarios concerning the geopolitical situation, OPEC supplies, possible release of strategic stocks by the US and other OECD countries and global demand.