OPEC would need to cut production sometime in the second half of 2013 or early 2014 to stave off "a large drop in prices," Kuwait's leading bank said in a report over the weekend.
In its latest economic bulletin, released late Sunday, the National Bank of Kuwait laid out three price scenarios for the remainder of 2013, each of which could result in OPEC cutting production "to prevent prices from falling too far below the organization's unofficial $100/barrel target level." But the bank did not estimate how much output OPEC would have to cut or how much global crude oil prices would fall if it failed to act.
The scenarios are based on modest demand growth and increased output by non-OPEC countries, the bank said.
Detailing the expected rise in non-OPEC production, the bank predicted such supply would increase by 900,000-1.2 million b/d in 2013, of which increased production of condensate and other natural gas liquids by OPEC countries would account for at least a quarter. OPEC output figures and production quotas do not include NGLs and some other forms of non-conventional crude.
High North American oil output was likely to compensate for expected reductions elsewhere, including maintenance-related declines in North Sea oil production and potentially a fresh halt to recently-restored South Sudan oil flows through neighboring Sudan, NBK said.
The bank forecast a year-on-year increase in global oil supply of less than 1 million b/d in 2013, as expected OPEC cuts partially offset higher non-OPEC production.
In the first price scenario for the rest of 2013 -- where demand remains modest and non-OPEC supply increases by 1.3 million b/d -- the bank expected the price of Kuwait Export Crude to slip to about $100/b, down roughly 5% from the current price.
On its website, Kuwait Petroleum Corporation reported a July 19 price of $105.36/b for Kuwait Export crude. By comparison, the front month contracts for global crude oil futures ICE Brent and NYMEX crude settled at $108.07/b and $108.05/b, respectively on July 19.
Under the second scenario -- which has non-OPEC production rising by 1.5 million b/d -- the bank said OPEC would need to make more aggressive production cuts to prevent a significant slide in oil prices. It predicted that the price of Kuwait Export Crude would drop to $90/b in early 2014 after hovering near $95/b in the second half of 2013.
If, instead, non-OPEC output rose by just 600,000 b/d in 2013, then global crude oil prices and the price of Kuwait Export Crude would be supported above $100/b. However, OPEC would still need to reduce output early in 2013 to prevent oil prices from falling further, the bank said.
It attributed a July rally in oil prices to higher-than-expected seasonal demand, including a relatively strong summer driving season in the US and increased Middle East power sector demand for oil during the air-conditioning season.
Meanwhile, the bank cited "exclusive sources" within Saudi Arabia as saying the kingdom's crude output had reached 9.7 million b/d in July.
The latest Platts survey of OPEC production shows Saudi output rising to 9.65 million b/d in June from 9.2 million b/d in February and March.
A large drop in US crude inventories and concerns over Egypt's political turmoil potentially disrupting Suez Canal tanker traffic had recently added upward pressure to oil prices. But given the broader slowdown in the global economy in 2013 and rising global oil supplies, oil prices for the remainder of the year faced a predominantly downside risk, the bank said.
It further predicted that Kuwait would amass a "massive budget surplus," for the fiscal year ended March 2013 in which Kuwait Export Crude averaged $107/b. It would be Kuwait's 14th successive budget surplus.
Although final accounts have not been released, the bank estimated that the 2013 average oil price and lower expenditure would hand Kuwait a surplus of Dinars 12.8 billion-15 billion ($44.89 billion-52.60 billion). That is before 10% of all earnings are remitted to the country's future generations fund.
The bank's financial projections for the current fiscal year ending March 2014 are linked to its three oil supply scenarios. They predict a Kuwait Export Crude price of $94-$100/b for the current fiscal year.
The bank forecasts a surplus for fiscal 2013-2014 of Dinars 8.1 billion-11.2 billion before allocations to the generations fund. This would be equivalent to 17-23% of forecast GDP for the fiscal year.
