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.