JEDDAH – Although the recent downswing in oil prices below the $90's level has not prompted any reaction from the Kingdom yet, National Commercial Bank said in its Economic Review for the month of July that the Kingdom's view of a fair oil price remains $100. Should the market balances actually warrant a reduction in production, it is expected that Saudi Arabia will reduce output aggressively. Moreover, while Saudi Arabia appears to have taken a dovish stance at the latest OPEC meeting by aiming for a soft landing of prices at about $100 per barrel, it is likely that the pace of the latest freefall in prices to below $90 for Brent crude might have stirred an element of nervousness in OPEC members. “Although the recent downswing in prices below the $90's level has not prompted any overt reaction from the Kingdom yet, we believe the Kingdom's view of a fair and defensible oil price remains $100. Should the market balances actually warrant a reduction in production, it is expected that Saudi Arabia will be among the first to reduce output aggressively," NCB said. The high increase in petrochemical exports of 21.4 percent in value terms compared to the 3 percent increase in tonnage is in line with elevated oil prices stemming from the geopolitical developments especially, the US-Iranian standoff. Crude oil markets had a volatile week, with prices first surging higher on June 29th on optimism the European debt crisis may be contained after leaders agreed to ease repayment rules for emergency loans to Spanish banks and relax conditions on help for Italy, but then quickly declined on July 2 on new data that Euro-area unemployment reached the highest level on record. Meanwhile, demand has been under downward pressure, owed to weaker economic growth in advanced economies, crude oil inventories above historical average, particularly, in the US, and soft landing in major emerging economies, especially, China. Moreover, despite recent optimism, worries on Europe's ability to solve its ongoing financial crisis will remain an enduring concern. The US EIA noted that US commercial crude oil inventories reached 387.2 million barrels, which is above the upper limit of the average range for this time of year. While China's crude oil imports rose by 14.4 percent in May to a 5.99 mb/d, it is expected that its imports for June's have inched down, as China's PMI fell from 50.4 points in May to at 50.2 in June. On the supply side, Iranian crude exports have been hit by US sanctions and threaten to cut them even further following the recent EU's sanctions, which were just implemented on 1 July. In addition, the ban on provision of protection and indemnity for ships carrying Iranian crude by insurance and reinsurance European companies, already going into effect, will hit most of the major Iranian crude importing countries. While European imports have adjusted, the insurance ban is likely to affect crude flows into India and South Korea in particular, thereby narrowing the surplus on the supply side. Iran's production was already down at 3.32 mb/d in May from 3.65 mb/d at the end of last year, as much of this has gone into storage. Oil exports have fallen sharply, and even prior to 1 July, they are estimated to have declined by 20-30 percent from their normal levels of 2.2 mb/d. NCB study expects prices to eventually build a base for a recovery, but sustained price upside is still some time away. Meanwhile, further pressure could be brought to bear on Iran because of an increase in OPEC's oil. Although Saudi production hovers around 10 mb/d, it has not increased significantly much over the past 10 months. Over the short term, NCB said it expects to see a global downturn marked by overall currency devaluations as world economies sustain the blows from the eurozone being offset by positive indicators rising from increasing quantitative easing expectations. Food prices have posted a gain of 4.8 percent Y/Y and are expected to remain elevated as businesses build up their stocks in preparation for the holy month of Ramadan. Systematic risks pressured stock prices downwards as the global economy struggles with the European debt crisis. The only two sectors to record a gain over the month were transport, gaining 5.0 percent, and hotel and tourism growing by 2.1 percent. Fresh lending by Saudi banks was focused toward the consumer and credit cards category. – SG
