Kuwait Economic Brief

Oil Market & Budget Developments

Crude prices surge back towards $70 on economic recovery hopes... Kuwait budget could see surplus KD 5 bn surplus in FY2009/10…
Crude oil prices staged a further impressive rally in May, coinciding with hopes that growth in the global economy is set to re-emerge. The price of Kuwait Export Crude (KEC) surged by $16 per barrel (pb) to $66 between end-April and 2nd June, its highest level since mid-October and more than double the lows of $32 seen at the end of last year. In addition to signs of improving economic conditions from surveys of manufacturing – notably in emerging markets, but also in Japan and the West – the continued rally in equity prices is likely to have alleviated some of the pressures on corporate balance sheets, as well as eased funding constraints. Although rising commodity prices appear to be a vote of support for the extreme measures deployed by global policy makers to stave off economic weakness, ironically, fears that those same measures are stoking inflationary pressures are also contributing to higher speculative demand for crude oil, which is often viewed as an inflation hedge.

Crude prices converging on OPEC’s ‘fair’ price of $75 pb…
Support for higher prices can also be seen in futures markets for major global benchmark crudes, such as West Texas Intermediate (WTI) and Brent. Spot prices for these blends have been trading at major discounts to their futures prices since 3Q 2008; for WTI, this discount reached a peak of $36 pb in January, with the December 2012 contract price stuck at around $70+ pb. By the end of May, however, this gap had shrunk to around $10 as spot prices rose. One reason that futures and spot prices are converging at the higher level could be a growing belief that OPEC will deliver on its desire to see oil prices at what it believes is a ‘fair level’ of $75 pb. The organization lent support to this claim at its meeting in May, where it left production quotas unchanged and appeared to signal that its bias remains towards further supply cuts. It noted that “crude volumes entering the market are still in excess of actual demand” and that crude inventories, while having fallen, “remain high”.