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Kuwait bounces backMarch 11 2022

Kuwait to reap the benefits of new oil boom - for now

While Russia's invasion of Ukraine has boosted oil prices to multi-year highs, production constraints will constrain the benefit Kuwait enjoys. John Everington reports.
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Kuwait to reap the benefits of new oil boom - for now

After weeks of posturing and negotiations, Russia’s invasion of Ukraine prompted disbelief and retaliation, creating havoc for oil markets with far-reaching consequences for Kuwait — which earns around 90% of its revenues from oil exports — and other major oil producers. 

Russia’s March 2020 refusal to go along with production cuts agreed days previously by the majority of the OPEC+ producers group brought to an abrupt end the international consensus underpinning oil prices for the previous four years. The refusal to sign up to cuts in production, followed days later by retaliatory discounting measures by Saudi Arabia, saw oil prices plunge below $30 per barrel, with falls exacerbated by early Covid lockdowns. 

Fast-forward two years and Russian actions have sent oil prices spinning in the other direction. After having climbed to seven-year highs in late 2021 on an improved global economic outlook, the invasion of Ukraine in late February has seen prices rise as high as $139 a barrel in early March, providing a windfall for producing nations. 

“Higher oil prices will benefit hydrocarbon-exporting sovereigns, lifting government revenues and exports and, in turn, allowing the sovereigns to repair balance sheets and rebuild he buffers eroded during 2020,” said Moody’s Investor Service in a research note in early March.

The prospects of international blockades of Russian oil — stoked by import bans by the US and UK in the early part of the month — raised the prospect of even further rises, with Bank of America warning widespread boycotts could lift prices to over $200 a barrel. 

OPEC+ has so far resisted calls to increase production beyond previously agreed measures. The bloc confirmed at its meeting on March 2 that it would next increase output by a modest 400,000 barrels per day in April, as previously agreed.

Yet it is uncertain of for how long producers can hold out in the midst of a growing clamour to reduce pressure on prices by increasing output. 

“In our view, elevated oil prices cannot be sustained for long because of economies’ limited ability to absorb higher oil costs without an economic slowdown,” according to the Moody’s note.

The UAE’s ambassador to the US, Yousef Al Otaiba, told the Financial Times on March 9 that the country would encourage OPEC “to consider higher production levels”, his comments prompting a lowering in prices.

Kuwait’s production problems

As producers weigh their response to world events, Kuwait is widely predicted to only alter its output in tandem with other producers once a wider agreement is reached.

“Kuwait has little incentive to break with OPEC and it is not usually a trendsetter within the bloc anyway,” says Robin Mills, CEO of Qamar Energy. 

While Kuwait has the sixth-largest proven energy oil reserves in the world, the country has limited scope to raise production due to longstanding capacity constraints. National producer, the Kuwait Oil Company, admitted in October that its maximum sustainable production capacity had decreased for a third consecutive year. 

“We think Kuwait should be able to keep increasing its production in line with its OPEC+ quota through about mid-year, but not rise much further than that,” says Herman Wang, managing editor for OPEC and the Middle East at S&P Global Commodities Insights. 

“There is more upside in the Neutral Zone [between Kuwait and Saudi Arabia], but so far technical problems have prevented a full ramp-up there to pre-shutdown levels.” 

Mr Wang notes that the country’s oil sector has been adversely affected by the Kuwait’s political instability, which has prompted frequent turnover at the oil ministry and national oil companies, leading to project delays, including the renovation of the country’s giant Burgan oil field. “Fields where new growth could come from are geologically complex and will require significant technical expertise and investment to develop,” he says. 

Mr Mills forecasts Kuwait’s production will hit a ceiling in or around September, with capacity not increasing further for the next two years. 

“Apart from one new 100,000-barrels-per-day gathering station, some rehabilitation of the Neutral Zone and more drilling of heavy oil, there is not much activity to replace natural declines,” he says. 

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Read more about:  Middle East , Kuwait , Kuwait bounces back
John Everington is the Middle East and Africa editor. Prior to joining The Banker, John was the deputy business editor of The National in the UAE, and has also worked for Dealreporter, Arab News and The Telegraph. He has also covered the telecom sector in Africa and the Middle East, living and working in Qatar and the UK. John has a BA in Arabic and History and an MA in Middle Eastern Studies from the School of Oriental and African Studies (SOAS) in London.
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