JEDDAH – A day after announcing the Saudi budget for fiscal year 2014, Riyadh-based Jadwa Investment forecast a budget surplus of SR140.8 billion in 2014, equivalent to 4.8 percent of expected GDP. Jadwa, commenting on the new budget, said the projected surplus was based on the expected higher oil prices than that was used in the budget and “therefore oil revenues will exceed the budgeted total.” Jadwa forecast total oil revenues to the budget at SR957.8 billion and non-oil revenues at SR116.6 billion. Spending will be above the budgeted level. Over the last 10 years, actual government spending has averaged 24 percent higher than the budgeted amount. The extent of overspending eased in 2013, when it was 12.7 percent, the lowest level since 1999. Given that spending has already reached a very high level particularly on the investment side and given the more prudent expenditure control together with the low rise in spending budgeted for 2014, Jadwa expects that the actual spending in 2014 will be relatively close to the budget projection leading to a total expenditure of SR932 billion. The oil price level necessary for revenues to balance the forecast level of government spending, known as the fiscal breakeven oil price, is $81pb for Saudi export crude (equivalent to around $85pb for Brent). This is based on our production assumption of 9.4 million barrels per day, domestic consumption of 2 million barrels per day and an oil export/revenue transfer ratio of 88 percent. Rising domestic gas production should take some of the burden from oil as the fuel for domestic energy consumption next year. According to JODI, domestic crude consumption for the first nine months fell by 9 percent year-on-year. Moreover, Jadwa said its macroeconomic forecasts for the Kingdom are based a moderate decline in oil prices compared to their level this year. “We forecast that Saudi export crude will average $100 per barrel (equivalent to $104pb for Brent) in 2014 compared with a year-to-date average of $104pb (equivalent to $109.6bp for Brent). With output from Iraq, Iran, Libya and non-OPEC countries expected to steadily rise over the course of next year, we maintain our view that the Kingdom's oil production will gradually fall in 2014 to an annual average of 9.4 million barrel per day (mbpd).” Overall, global oil demand is expected to rise by 1.3 percent year on year to 92.1mbpd. According to the International Energy Agency (IEA), global oil demand will grow by 1.1mbpd next year compared with a growth of 1.04mbpd in 2013. Demand by OECD countries is expected to decline for the fourth consecutive year (by -0.19 mbpd in 2014), while that of the non-OECD countries will increase by 1.32mbpd in 2014. China, India and other non-OECD Asia- Pacific countries will account for the bulk of this increase in demand (55 percent) followed by Middle Eastern countries(19 percent). This will in turn maintain a robust demand on Saudi crude exports particularly considering that the Saudi oil exports to these two regions account for 69 percent of total crude oil exported by the Kingdom in the last five years, Jadwa noted. Total world oil output should also rise in 2014 owing mostly to a rapid increase in non-OPEC supply. In fact, the growth of the non-OPEC oil supply is expected to exceed global oil demand growth for the second consecutive year. According to the IEA, non-OPEC oil supply is expected to grow by 1.79mbpd in 2014 compared with a growth of 1.3mbpd estimated for this year. North America crude oil output growth is forecast to slow slightly from this year's rapid pace, but that will be more than made up for by better performance elsewhere in non-OPEC. This will create a pressure on OPEC countries to reduce their output in order for the market to be able accommodate additional non-OPEC supply growth. Jadwa therefore forecast that Saudi Arabia will slightly cut production to 9.4mbpd next year compared with 9.6mbpd in 2013. The current high commercial oil stocks show the market is well supplied. This should also pose negative element for oil prices. OECD crude stock levels remains at a comfortable level when measured in days of forward cover as well as relative to their five-year average. This reflects both weaker demand by non-OECD countries as well as higher production from non-OPEC countries. Geopolitical risks and increased liquidity poured into the system from central banks also need to be considered when forecasting prices. The turbulence in the Middle East and North Africa added a risk premium to prices in the last few years and this will likely remain the case for most of next year as uncertainty is likely to linger. While the historic nuclear pact between Iran and the P5+1 should in principle reduce the geopolitical risk premium in the oil markets, the progress toward a full removal of economic sanctions is likely to remain gradual. At the same time, political instability in Syria, Iraq, Libya and Sudan will all maintain the geopolitical risk premium built into oil prices. Financial flows have also influenced oil prices in recent years. The US, Japan, and EU monetary easing measures have, among other factors, maintained elevated oil prices despite subdued global economic fundamentals in the last three years. Policy adjustments toward less accommodative monetary stance especially in the US would, according to Jadwa, have a temporary negative impact on crude prices. This is because monetary policy would be tightened only if economic outlook substantially improves which should offset any negative impact of a less simulative monetary policy on oil prices, it added. — SG
