JEDDAH – Saudi Arabia's crude oil production will average 9.7 million barrels a day next year, the National Commercial Bank (NCB), said recently in its latest Saudi Economic Review. That compares to a forecast of about 9.4 million barrels a day this year, said the report. Arab Light crude, which makes up about 50 percent of Saudi Arabia's oil output, will average $105 a barrel this year, unchanged from a March 26 forecast. Prices will average $100 a barrel in 2013, it said. NCB further said crude oil prices took recovery recently, reaching their highest levels since mid-May with Brent approaching $113 per barrel. The market sentiment has become more positive, trending upward, as the scale of the rally since June 22nd is nearing 30 percent, and reaching in absolute terms around $25 per barrel. While the $110 level was attained fairly easily, the $115 appears achievable on the current trend in fundamental data and, especially, geopolitical developments. The factors that have been driving this rally include: 1) supply and demand fundamentals, attributed to prompt market tightness and a series of outages and disruptions, and combined with modest demand and weaker prospects for non-OPEC supply; 2) geopolitical developments, which have been intensifying on the escalation of violence in Syria with potential spillovers of the conflict into the region, as seen by upsurge of violence in Iraq, attacks on pipeline in Turkey, and increase in international tension over Iran's nuclear program; 3) the macroeconomic context, with Euro-sovereign debt worries currently being treated less critical, yet still represent the main mitigating factor for any lengthening of the oil prices rally. The flow of global supply and demand data has been relatively positive recently, creating some momentum for demand prospects. In its monthly oil market report, OPEC has changed demand outlook, revising expected growth for 2012 up by 0.01 mbd to 0.9 mbd, and revising 2013 down by 0.01 mbd to 0.81 mbd. Complementing OPEC's projections, after being bearish on the prospects for demand in its previous report, US Energy Information Administration (EIA) went back the other way in its latest report, increasing the 2012 demand growth forecast from 0.67 mbd to 0.76 mbd, and the 2013 forecast from 0.73 mbd to 0.87 mbd. The non-OPEC supply growth forecast was cut from 0.75 mbd to 0.57 mbd for 2012, and kept unchanged at 1.26 mbd for 2013. Accordingly, the implied call on OPEC crude would increase by about 0.5 mbd for both 2012 and 2013. EIA revised its estimate of the call on OPEC crude for Q3 up by 0.2 mbd to 31.5. It also projected that surplus capacity in OPEC will average 2.3 million barrels a day in 2012 and 2.6 million in 2013. The general trend in the forecasts appears to reinforce Q3 as being likely to be the tightest quarter of the year from a fundamental viewpoint. Iraq's crude output averaged 3.08 mbd in July for the first time since the 2003 US-led invasion, 115,000 barrels more than the previous month. Iraq for a second month outpaced Iran, whose output fell by 173,000 barrels. Shipments from Iran have declined by 1.2 million barrels a day, or 52 percent since the sanctions banning the purchase, transport, financing and insuring of Iranian crude took effect July 1. It is estimated that Iran is exporting 1.1 mbd of oil, down from an average of 2.3 mbd in 2011. Daily production fell by 9.5 percent in July to 2.86 million barrels, the lowest level since February 1990. The reduction from Iran led to the third monthly decline in OPEC's output, reaching 31.2 mbd in July, versus 31.35 mbd in June. While Crude oil output in Nigeria reached an all-time high of 2.4mmbd after security improved in the southern oil-producing region, Saudi Arabian crude oil production was cut by 0.3 mbd in July, taking it below 10 mbd. However, Samba Financial Group forecast in August “Macroeconomic Forecast Update 2012-2013” that Saudi oil output would fall back by around 1 percent. It noted that the increase in domestic demand over the past decade is such that the Kingdom now consumes roughly a third of what it produces. Moreover, prices would remain volatile but the average for Brent this year should be around $105/b. An average price of $98/b is expected for 2013, it further said. The report further said oil prices will remain volatile, responding to movements in equities and exchange rates, as well as shifting sentiment on future supply and demand balances stemming from the unfolding crisis in the eurozone, as well as from the impact of Iranian oil sanctions. but should average above $100/b this year. Oil prices have undergone a major correction from their $124/b highs in mid-March. Brent will still average around $105/b this year, it added. A combination of weakening global growth and the escalating crisis in the eurozone saw oil caught in the widespread sell off in global assets in April/May. The IEA has revised down marginally its 2012 global demand projection to 89.9m b/d, but this still represents an incremental increase of 818,000 b/d, higher than that estimated for 2011, driven by sustained demand growth in emerging markets. The agency expects the call on OPEC crude to be some 30.3m b/d in 2012, and with OPEC currently producing at over 31m b/d there is scope for further inventory builds in the second half of the year, which could be very bearish for prices. – SG/QJM
