Opec decision good news for Kuwait

In its latest economic brief on oil the market and budget developments, National Bank of Kuwait reports that stronger than expected demand for oil combined with tight crude oil inventories helped push oil prices generally higher since the beginning of the year.

Kuwait export crude averaged $28.8 in January, versus $28.1 in December. In February, KEC weakened slightly to average $27.1 during the first three weeks, despite an OPEC decision to cut oil supplies effective April and to reign in overproduction.

With no negative surprises this should keep the price of the OPEC basket of crudes close to the upper bound of OPEC's targeted range. Kuwait would thus have a good chance of realizing a budget surplus next fiscal year, albeit much smaller than this year's anticipated surplus of KD 1.5 billion.

Meanwhile, tension in Venezuela and Nigeria in addition to political uncertainty in Russia continue to put on a premium on oil prices. This did not keep OPEC from agreeing to make a cut in production during its February meeting.

The organization decided to reduce output ceilings by 1 million barrels per day (mbd) beginning in April and to clamp down on overproduction from March. This decision was a result of OPEC's view that oil production could otherwise exceed demand during the second quarter, a quarter typically characterized by seasonally weak demand.

The market's reaction was limited in part as some doubt persisted as to OPEC's ability to implement reductions in production given current high oil prices.

According to the NBK report, while OPEC remained pessimistic on demand growth, colder weather and solid growth in Chinese demand led other market participants to be more bullish.

Growth forecasts for 2004 have seen a number of upward revisions in recent months. Between October 2003 and January 2004 expected growth in demand was raised from 0.9% to 1.5% by the Centre for Global Energy Studies.

The new OPEC-10 ceiling effective from the start of April is 23.5 mbd. Kuwait's ceiling will be cut by 0.08 mbd to the new level of 1.886 mbd. During January OPEC-10 output was 8% above the ceiling. OPEC's latest decision includes a pledge to reduce this level of over-production starting in March, though the market does not appear to give this much credibility at this point.

NBK expects the price of Kuwait export crude to average $28.2 during 1Q04 before weakening somewhat during the remainder of the year. More stringent enforcement of recent OPEC cuts should ensure that seasonal reductions in demand will not cause major price weakness.

However, OPEC will need to reverse cuts by the fourth quarter to meet higher winter demand, with the average KEC price for the year expected to stand at $25. If OPEC fails to reign in overproduction NBK expects the price to drop more dramatically, though it should remain above $20 per barrel.

Under this scenario the average for the year should stand at $22.6. On the other hand, if demand turns out stronger than current expectations the weakening of prices could be tempered with KEC likely to average $28.1 for the full year.

Under such scenarios, the NBK report expects the price of Kuwaiti crude to average $26.6-$26.9 in fiscal year 2003/04. Government revenues would likely stand at KD 6.75-6.86 billion, almost double the KD 3.56 billion projected in the draft budget.

If the government spends the entire KD 5.83 billion in budgeted expenditures, we could see a KD 917-1,033 million surplus. However, NBK expects expenditures to come in about 8%-10% below budget, which means the budget is likely to see a surplus closer to KD 1.5 billion before the allocation of 10% of revenues to the Reserve Fund for Future Generations.

For the next fiscal year 2004/05, preliminary information reveals a 6% planned increase in spending, and the budget to break even at an average KEC price of $28.8 if the entire allocation is spent.

However, with spending likely to be below budget, the breakeven KEC price will be closer to $25, which coincides with NBK's mid-range forecast at this point. There remains a good likelihood that the budget will be in surplus again next fiscal year by a few hundred million dinars.