JEDDAH – The Organization of Oil Exporting Countries (OPEC) will likely consider supply cuts next year to prevent prices from falling and to protect Brent crude at $90-110/bbl, especially that the market remains well balanced with sufficient supplies ready to counter any short-term disruptions or heightened geopolitical risks, the National Commercial Bank said in its December “Saudi Economic Review” released Saturday. Saudi Arabia has been unilaterally decreasing its supply in recent months, curbing output to a 13-month low of 9.67 mb/d in November, the report said. It is expected that Saudi Arabia will cut production further going into next year to protect prices at $90 to $110 a barrel for Brent crude. Brent crude prices have remained within a range of $105 to $115 a barrel since early August as traders balance the possibility of weakening global demand against geopolitical tension in the Middle East. Brent crude price for January settlement increased to $109.28 a barrel last week, while WTI was up to $86.23 a barrel, leaving it $23 a barrel below Brent. Meanwhile, Brent crude is heading for its highest annual average price of $112 a barrel in 2012. On the other hand, WTI has fallen 11 percent this year as the US produces oil at the highest rate in two decades amid a boom in horizontal drilling and hydraulic fracturing, putting the US on course to become self-sufficient in energy. Oil prices rose after the IEA increased its oil demand forecast for 2013, and as OPEC decided to keep its production target unchanged at 30mb/d in its meeting last week. The group judged that prices are sufficiently high and expressed its satisfaction with the current market balance, amid forecasts that supply will outpace demand for their crude in 2013. On the demand side, global consumption in the final three months of 2012 is expected to average 90.5 mb/d, 0.5 percent more than previously forecast by IEA. Oil markets seem to be more optimistic about the Chinese economy as confidence indicators recently turned expansionary after a long period of pessimism. While OPEC's forecasts show that it's production is more than consumer needs, Saudi Arabia, Iraq, Iran, UAE, Angola, Ecuador and Libya have indicated that supply and demand are approximately in balance. On the supply side, total production by OPEC countries slid to an 11- month low of 30.78 mb/d in November. “However, this is still above the official ceiling and about 1.0 mb/d more than the projected average demand for OPEC crude next year,” the report said. The market remains well balanced with sufficient supplies ready to counter any short-term disruptions or heightened geopolitical risks. OPEC members are competing with a surge in shale oil output in the US, which last year bought 21 percent of the group's exports. US oil output increased, as horizontal drilling and hydraulic fracturing unlock resources in North Dakota, Texas and Oklahoma. Production climbed to an 18-year high of 6.71 mb/d, and expected to rise by 640,000b/d to 7.1 mb/d next year. Meanwhile, Saudi Arabia's monetary system continues to overflow with liquidity as the monetary base (M0) expands for the fifth consecutive month, expanding by 16.4 percent M/M, and setting an all-time record at SR334.9 billion during October, surpassing January's SR299.4 by quite a feat, the NCB report said. On an annual basis, M0 increased by 28.9 percent, a growth figure unseen in almost three years. The Saudi Arabian Monetary Agency (SAMA) will certainly be challenged to limit the risks from such excess liquidity. The main driver was deposits with SAMA which grew by a staggering 51.5 percent. The cyclical increase in deposits with SAMA during the fourth quarter of the fiscal year has been apparent over the past five years as banks overhaul their balance sheets for annual reporting towards the end of the year. In addition, currency outside banks recorded a growth of 12.2 percent Y/Y to reach SR138.0 billion during October. Furthermore, cash in vault reached SR27.1 billion, an annual rise of 10.0 percent during the same month. The rise of M0 is October was higher than expected, but we still expect a slowdown for the next few months as base effects offset the pace of annual acceleration. As for broad money (M3), growth edged closer to the elevated levels of 2011 by posting an increase of 13.0 percent Y/Y by the end of October. The highlight of broad money was the sizable growth in time and savings deposits. Amid the globally suppressed interest rate market, time and saving deposits managed to gain a significant 15.2 percent during October over the same month last year. The rise resulted in increasing its share of M3 to 24.1 percent at SR325.0 billion. Meanwhile, the main component of broad money, demand deposits, continues to outpace time and savings deposits by posting an increase of 15.8 percent Y/Y. The last component of M3, other quasi-monetary deposits, remained stagnant as it only recorded a 0.3 percent gain on an annual basis. However, due to the aforementioned, SAMA managed to increase its net foreign assets by a substantial 20.7 percent Y/Y during October to reach SR2.35 trillion. The elevated levels of oil prices and overflow of liquidity aided the buildup of excess reserves which reached 59.5 percent during the month, up from June's 44.6 percent. Accordingly, the inflation rate picked up slightly to 3.8 percent on an annual basis by the end of October, breaking a consecutive seven-month decline streak. Foodstuff is one of the influential categories in the benchmark inflation rate as Saudi is import oriented, excluding oil trade. Food prices rose by 4.7 percent for the month of October, higher than this year's average of 4.3 percent albeit lower than 2011's 5.2 percent average. Meanwhile, the category of renovation, rent, fuel & water posted its slowest annual growth since May 2007. Rental prices continued their downward trend which lowered the category's inflation rate to 6.7 percent Y/Y during October. The anticipation of the mortgage law is expected to further drag down prices on real estate until the codifying is announced. We expect the inflation rate to pick up early 2013 as liquidity buildups drive consumer prices higher. – SG
