The Organization of Petroleum Exporting Countries (OPEC) left production quotas untouched previous month and appears to be increasingly set to tolerate prices to remain temporarily below what it sees to be their fair value of $75 per barrel. That may help to cap further gains in crude prices through the summer.

The price of KEC averaged $78.5 per barrel in fiscal year 2008-09, and we expect this to have produced government revenues of approximately KD19.9 billion, up 11 per cent on the year before, the National Bank of Kuwait (NBK) said in a research note.

Although final spending numbers will not be released for some time, we see the fiscal year 2008-09 budget recording a surplus ranging between KWD2.9bn and KD3.6bn before allocating 10 per cent of revenues to the Reserve Fund for Future Generations (RFFG), NBK said.

This is, however, after removing exceptional transfers of KWD5.5 billion to the Public Institution for Social Security, without which the estimated surplus would be around KWD8.4 billion to KWD9.1 billion, NBK said.

In fiscal year 2009-10, which began on April 1, NBK estimates the price of KEC will average between $37 and $62 per barrel, 21 to 54% lower than in fiscal year 2008-09, resulting in correspondingly weaker oil revenues.

Based upon the government’s recently approved budget, but assuming that typically spending ultimately comes in five to 10 per cent below plan, Kuwait’s budget balance could range between a KD2.5bn deficit to a KD4.5bn surplus next year, before payments of 10 per cent of all revenues to the RFFG, NBK said.

Other benchmark crude prices shared in the March 2009 rally. West Texas Intermediate (WTI) gushed back above the $50-per-barrel mark in late March 2009, achieving a peak of $54.3 on March 26, 2009 while Brent was $52 on the same day.

Prices settled back around the $50 mark in early April 2009. On the whole, crude prices have rallied between 40 and 60% from their lows of late December 2008, but they are still well under the level of a year ago.

Crude futures have also become more bullish over the past month. After trading close to the $65-per-barrel mark for much of this year, the December 2012 light crude contract, for example, has moved into the $70-$75 range since mid-March 2009.

However, the International Energy Agency (IEA) has cut its forecast for oil demand growth in 2009 by a further 0.3 million barrels per day (mbpd) to 1.3 mbpd. This is the IEA’s seventh consecutive downward revision to demand prospects for the year. OPEC expects demand to fall by a little over one mbpd, larger than the 0.6mbpd drop projected just a month ago.

The Centre for Global Energy Studies (CGES) is the least pessimistic, forecasting a fall in demand of 900,000bpd in 2009.

OPEC has said that due to the global economic downturn, China, the Middle East and other Asian countries are no longer the initiators of high growth to world oil demand.

NBK, however, considers the news on the supply side is more bullish. Despite OPEC divisions regarding production strategy, the bloc continues to push with its massive pre-announced quota cuts, which are aimed at dipping its crude supplies by 4.2mbpd from September 2008 levels.

Latest unofficial data show that 3.3mbpd (80 per cent) of the cuts had already taken place by February, with 1.5mbpd of those coming from lynchpin producer Saudi Arabia, NBK said.

The Kingdom appears to be the one country producing below its quota-compliant levels, emphasizing the key role that it is likely to play in holding the cartel’s production strategy together.

Beyond OPEC policy measures, the view that the current economic crisis is leading to a reduction in investment plans in the oil sector and, therefore, pushing the long-term price of oil above current levels is gaining ground, including through distress-noises from major oil producing companies themselves, the bank said.

Such pressures could possibly translate into an upward shift in oil prices in the close by future, it said.

Even if OPEC does not apply the remaining parts of its pre-announced output cuts, crude prices could still drift higher as the demand profile improves each quarter, NBK said.

Under such a scenario, we could see the price of KEC climbing steadily from an average of $41 in first quarter of 2009 to around $53 by early 2010, averaging $49 for fiscal year 2009-10 overall, it said.