Oil prices are expected to strengthen further in the third quarter of 2011 because of strong demand and this will keep business mood in Saudi Arabia high, according to the Gulf Kingdom’s largest bank.
Saudi Arabia, which controls over a fifth of the world’s proven oil deposits, boosted crude supplies to around 8.864 million bpd in May from 8.796 million bpd in April to compensate for the oil disruption in Libya and is expected to increase further in second half of 2011 to boost global supplies and help lower prices.
As a result, the country’s fiscal balance is expected to register a strong surplus in 2011 while public expenditures will continue to be determined by the performance of the hydrocarbon sector, National Commercial Bank (NCB) said in its third quarter business optimism index (BOI), sent to Emirates 24/7.
“The BOI survey reveals that Saudi Arabia’s hydrocarbon sector optimism has surged in the third quarter of 2011.
The overall BOI composite score for the sector is 63 versus 50 in Q2 2011, due to a higher BOI score for all three parameters….respondents in the survey expect prices to rise further as demand for oil remains strong and will continue to grow,” NCB said.
“Nearly 70 per cent of the businesses expect prices to go up in Q3 2011, while 25 per cent anticipate no change.”
The survey showed the net profits expectations of the industry players have shown a marked improvement over the previous quarter, the BOI for which is recorded at 65, compared to 50 in the last quarter.
NCB noted that the key drivers for the Kingdom’s strong growth this year are high oil prices as well as the non-oil GDP, supported by the huge government spending. Its forecasts showed Saudi Arabia’s real GDP will grow by about 5.3 per cent in 2011 on the back of a 4.1 per cent growth in 2010.
“The growth momentum will be partly bolstered by increasing oil production, which is being done to compensate for lower output elsewhere in the region. As a result, both fiscal and external balances are likely to register strong surpluses, which will help the country address long term priorities such as diversification away from oil, build a favorable business environment and improve access to finance for businesses,” the report said.
The BOI survey revealed that despite a drop in the composite index, business optimism still remains very high in Saudi Arabia.
As for inflation, the report cited government data showing the rate dived to a 16 month low of 4.6 per cent in May, mainly due to a drop in food costs.
“However, inflationary pressures are expected to build up in the second half of the year in response to the additional spending measures announced by the government, the weak Dollar and high raw material prices,” it said.
The survey showed the slide in expectations in demand and prices has also lowered expectations for profits and inventory levels.
It said the BOI for the Net Profits parameter is recorded at 57 in Q3, down from 82 in the second quarter. “Respondents are less optimistic with respect to inventories compared to the second quarter; the BOI for Level of Stock stands at 36 in Q3 2011, down from 51 in the previous quarter.”
Among the various sectors surveyed, the transportation sector is most optimistic with respect to demand conditions and profitability in Q3 2011, recording the highest BOIs for sales, new orders and net profits, the report said.
The construction sector, a key component of GDP, is most optimistic regarding price levels, while the finance, insurance and real estate sector is most optimistic about hiring in the third quarter.