Kingdom's hydrocarbons GDP to stage a mild rebound in 2014-15

Weaker oil output and revenues will have an impact on Saudi Arabia’s hydrocarbons GDP growth, and the government’s revenue and spending. The downward drift of oil prices might also begin to weigh on private sector confidence, according to a report by Samba Financial Group. These trends should be kept in perspective and hardly signal a crisis: Average oil prices will remain well above their historical trend and the government’s fiscal position will remain comfortable. Yet the pace of economic expansion, which has been rapid over the past few years, seems set to slow. This might not be a bad thing, as the economy “takes a breather” and digests the large amount of infrastructure investment already made.
The Samba report said hydrocarbons GDP will contract this year before staging a mild rebound in 2014-15.
It is clear that hydrocarbons GDP will go into reverse this year. The past three years have seen average gains in crude oil production of around 7 percent, as the Kingdom ramped up production to offset outages in Libya and then Iran. Iranian production continues to be squeezed, but Libyan output is back to pre-revolution levels.
More pressing, both Iraq and North America’s output has also gathered pace, and Saudi Arabia has already trimmed crude production sharply from around 10 million bpd this time last year, to some 9.2 million bpd currently as it seeks to prevent a significant loosening of international oil markets.
Some increase is likely in the months ahead to meet the seasonal rise in domestic demand, but overall output this year is likely to be around 4 percent below last year’s average.
Crude oil is not the only element of hydrocarbons GDP: Natural gas liquids (NGLs) are an increasingly important part of the picture. NGLs command a premium on the international market and are also an important part of the feedstock mix for the Kingdom’s own petrochemicals projects. In terms of production, NGLs have the added advantage of falling outside of the OPEC quota system, and can therefore be produced with impunity.
Despite the increasing importance of NGLs, they will only partially offset the impact on the national accounts of reduced crude output. Thus, our forecast of a 4.1 percent decline in 2013 crude output is likely to mean a 3 percent overall decline in hydrocarbons GDP. Looking into 2014-15, the outlook for crude output improves a little: Assuming some pickup in global economic activity and the continued rapid pace of domestic demand growth (currently running at some 7 percent a year) then crude output should increase by some 2 percent a year; NGLs output should show quite a pronounced increase next year as a number of projects come on stream. The hydrocarbons sector is therefore expected to post growth of some 3-4 percent a year in real terms during 2014- 15.
Meanwhile, the Samba report said Saudi petrochemicals sector is perhaps more vulnerable than it has been for some time. On the supply side, there is a clear challenge from North American (mainly US) competition, as US petchem plants are reinvigorated by the abundance of cheap gas on the continent. On the demand side, the outlook for Chinese growth has worsened. China’s demand for petrochemicals will climb substantially over the long run, propelled by its domestic automotive sector. But in the short run the slowdown in China’s weaker pace of growth might begin to sap petrochemicals demand, and hence the call on Saudi NGLs.