Saudi oil output is forecast to increase by 0.6mbd to 9.3mbd in 2008 as demand and supply fundamentals will continue to support high oil prices in the long run. The National Commercial Bank (NCB) said in its latest report on “Saudi Economic Perspectives” that “based on our assessment of the fundamentals, we believe that the oil market will remain tight in 2008.” The oil sector remains the core of economic activity in Saudi Arabia, providing the financial underpinning for government expenditure plans and broader economic confidence. The speculative bubble in the oil market has also found support from fundamentals, which helped shape market expectations of supply growth stagnating in the face of growing demand. However, as the US dollar stabilizes and inflation subsides, speculative investment in oil will gradually fall, and hence prices will largely reflect the underlying supply and demand fundamentals. With higher crude oil output and investment in production capacity, real oil GDP is set to increase by around 5.6 percent this year, providing a significantly positive contribution to overall growth. Its outlook was backed up by strong oil demand growth in emerging market economies, namely Asia and the Middle East, which is expected to offset slowing demand in the US and other OECD countries. The non-OPEC supply growth is expected to fall short of demand growth for yet another year, it added. The report said actual non-OPEC supply growth has consistently fallen below the forecasted figures and is unlikely to improve in the long-run due to rising exploration and development as well as material costs that pushed up the marginal cost of oil production to $60-70/barrel for non-OPEC members, and foreign direct investment (FDI) restrictions in key oil exporting countries like Russia. Further, OPEC supply growth is expected to remain relatively flat eventually. This is because most OPEC producers have very little spare capacity, the report noted. Even with the Kingdom's excess capacity of around 2.1mbd, the report stressed, a high oil price threshold of around $40-45/barrel is required to deliver capacity expansions. Moreover, geopolitical tensions in key oil producing countries have intensified recently, particularly in Nigeria and the Middle East. Notwithstanding, it appears that speculation has gotten ahead of those fundamentals in the most recent oil price developments. Oil prices have significantly increased in recent months. The recent run-up in oil spot prices has been largely driven by the ever-increasing volume of speculative purchases of future contracts, NCB said in the report. Crude oil prices jumped to all-time intra-day high $147.27 on July 11, 2008. Crude oil futures offer a hedge against a falling US dollar and rising inflation and in an environment of declining global equities and interest rate cuts, investment in these contracts has become relatively attractive. “Accordingly, we have revised up our forecast for Saudi crude oil prices and output in 2008. During the first five months of 2008, average Saudi crude oil price stood at $101.3/barrel and average production of crude oil reached 9.15mbd, up from an average of $68.5/barrel and 8.7mbd in 2007. Based on our assessment of the fundamentals and intensity of speculative oil investment, we expect Saudi oil output to increase by 0.6 15mbd to 9.3 15mbd in 2008, and Saudi crude oil prices to average around $100/barrel, up by nearly 46 percent from the previous year. Consequently, this will have a positive impact on our outlook for the Saudi economy in 2008.” The current account surplus will be exceptionally strong this year, primarily on account of high oil export revenues. “We expect oil export revenues to increase by 26 percent to a new record of around $259 billion in 2008. Non-oil exports are also expected to be strong this year, but will grow at a slightly slower pace of around 8 percent to $30 billion. Nevertheless, total exports are forecast at around $289 billion in 2008, compared with $233 billion in the previous year. Imports are expected to grow by 11 percent to $92 billion in 2008, which is the largest in recent years,” the report said, adding that it “is based on robust domestic demand and higher global prices for food, raw materials and capital goods this year.” “Accordingly, we expect the current account surplus to reach an all-time high of $138 billion in 2008, much larger than the $95 billion in 2007, but relative to GDP it will stand at around 28 percent in 2008,” the report added. The economy's robust external position will be reflected in higher net foreign assets this year. In 2007, these assets grew by 30 percent to $312 billion, and had reached $365 billion by May 2008. Higher oil revenues will also lift the budget surplus in 2008. The budget surplus is expected to be around SR565 billion in 2008, by far, larger than the SR40 billion that was released in the 2008 government budget. This is largely due to higher oil revenues, which are expected to reach SR997 billion, while non-oil revenues are forecasted at SR75 billion in 2008. On the expenditure side, SR410 billion has been budgeted in 2008, out of which 40 percent are allocated to infrastructure and capital projects. However, the government will most likely exceed budgeted expenditures by an average of 13-15 percent, to reach around SR507 billion, as has been historically the case. The budget surplus will be large enough to stimulate the economy further by injecting additional funds into specialized credit institutions and the retirement of public debt. “We forecast real GDP growth to accelerate to 5.1 percent this year in line with the rebound in crude oil output while private investment in the non-oil sectors of the economy is expected to gather pace.” The report further noted that private domestic demand - primarily the manufacturing, construction, commerce and financial services - has become an increasingly important driver of economic growth, underpinned by structural and market liberalization reforms. In particular, manufacturing, construction, commerce and financial services are the leading sectors of the economy. The report likewise forecast that real non-oil GDP will increase by around 4.8 percent in 2008. Investment expenditure will be a key driver of growth in 2008. Although higher levels of investment will feed into inflation in the short-run, it will ease various supply bottlenecks within the economy over the longer run. The bullish stance on valued investment is premised on the fact that roughly 70 percent of the 578 announced projects at $210 billion, are in the advanced execution phases, that a significant portion of investment expenditure is being led by the private sector, that around 80 percent of the total value of the mega projects – incremental project additions – have picked up since March 2008. Liberalization initiatives are now accruing to many sectors, such as in services, petrochemicals and cement, in line with the Kingdom's WTO accession agreement. FDI inflows were expected to grow more as foreign companies participate in extensive joint ventures, accelerating corporate credit growth and strengthening backward and forward linkages. __
