OPEC fails to cut global oil glut

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Published May 24, 2017

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London - At first glance, OPEC’s cuts haven’t worked global

oil inventories remain well above normal levels. But the policy’s made a

difference where it really counts: juicing the coffers of finance ministries

from Baghdad to Caracas.

The resurgent flow of petrodollars explains why Saudi Arabia

and Russia have largely convinced everyone else in the deal to extend the

production cuts another nine months to the end of March 2018.

“Make no mistake, it is all about oil revenues,” said

Bhushan Bahree, a senior director at consultant IHS Markit. “The bottom line

for oil producers begins, unsurprisingly, with a dollar sign and ends in

billions.”

The International Energy Agency, which advises rich

countries on oil policy, said earlier this month that OPEC has a “financial

motivation to extend the supply cuts.” The IEA calculates the cartel earned

almost $75 million extra a day in the first quarter of this year than in the

last quarter of 2016, despite collectively cutting output to 31.9 million

barrels a day from 33.3 million. Consultant IHS Markit said Russia, the largest

country outside the cartel to join the cuts, also earned more.

OPEC and its allies believe they can continue earning more

while pumping less. Even those countries that question whether an extension can

re-balance the market and bring down elevated stockpiles don’t oppose an

extension. While oil ministers have a sense of defeat in their battle against

high inventories, finance ministers are happy, one OPEC delegate said.

Brent crude, the global benchmark, has risen from about $46

to $54 a barrel since the agreement to curb output by a total of 1.8 million

barrels a day was first decided in the final weeks of last year.

But oil prices have dipped below $50 a barrel a couple of

times as investors sold the commodity amid signs the global glut isn’t notably

easing. Brent rose 0.3 percent to $54.30 a barrel as of 1:42 p.m. in Singapore

on Wednesday.

“Charitably, one would argue that things have not quite

worked out yet,” said Jan Stuart, chief energy economist at Credit Suisse Group

AG in New York.

OPEC and non-OPEC countries meet on Thursday in Vienna to

approve the rollover as delegates say the nine-month extension has broad

support.

The extension is the latest attempt by oil producers to prop

up prices and revive their economies. The talks in Vienna are closely followed

elsewhere as they can affect everything from the share price of Exxon Mobil

Corp. to the Brazilian real and Nigerian sovereign bonds.

“The trend now regarding the output deal is to extend for

nine months,” Saudi Minster of Energy and Industry Khalid Al-Falih said on

Monday. “All I talked to from inside OPEC are supporting the nine months of

cuts.”

Al-Falih won the backing of Iraq to extend the cuts after he

flew into Baghdad for rare face-to-face talks in the Iraqi capital. The

Organization of Petroleum Exporting Countries and 11 non-members agreed late

last year to cut output by as much as 1.8 million barrels a day.

The supply reductions were initially intended to run for six

months from January, but the slower-than-expected decline in surplus

inventories prompted the group to consider an extension.

Read also:  IEA sees global oil glut worsening

Data from the US Energy Information Administration indicate

that maintaining the curbs into the first quarter of 2018 would bring

stockpiles back in line with the five-year average OPEC’s stated goal.

The risk for OPEC is that they haven’t been the only producer

to win from the cuts. The US shale industry, which became leaner and fitter

during the oil-price slump, has increased output 500,000 barrels a day since

OPEC started to discussing the cuts to 9.3 million and American-based companies

all reported stronger revenues year-to-date.

“OPEC faces a tough job: it has now learned how fast shale

can come up back,” said Giovanni Serio, head of research at oil trading house

Vitol Group BV.

BLOOMBERG

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