Despite weak oil prices,
OPEC still pockets more dollars
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[June 29, 2017]
By Alex Lawler
LONDON (Reuters) - With world oil
inventories swelling despite a global pact on cutting output and crude
prices falling by a fifth in the past month, OPEC appears to be losing
its battle to balance the market.
But there is one crucial fight the oil-exporting group has been winning
so far: its members have earned more money this year than last and the
prospect of higher revenues is likely to motivate OPEC to stick with
output cuts or even deepen them.
OPEC's first output cut in eight years has earned the group $1.64
billion a day so far this year, up more than 10 percent from the second
half of 2016, according to Reuters calculations based on OPEC figures
for average production and its crude basket price up until June 20.
Compared with the first half of 2016, when oil prices sank to a 12-year
low near $27 a barrel, the increase in income is a dramatic 43 percent,
even though production by the Organization of the Petroleum Exporting
Countries was little changed.
Income could rise in the rest of the year if, as OPEC hopes, a supply
glut is banished. OPEC plus Russia and other non-OPEC producers agreed
on May 25 to extend supply cuts to March, after an initial deal to keep
them in place for the first half of 2017.
"I expect the gains for OPEC to be higher during the second semester
2017 due to a tight market in the third and fourth quarter, despite an
oversupply from non-OPEC not tied to the OPEC agreement and
higher-than-expected production from Libya and Nigeria," said Chakib
Khelil, Algeria's former oil minister.
He estimated OPEC revenues rose about 8 percent in the first half of
2017, following its move at the end of 2016 to cut overall output by
about 4 percent.
"The overall gain in revenues for OPEC would be in the 9 to 10 percent
range for the whole of 2017 compared to 2016," the former minister said.
OPEC's decision in late 2016 to return to a policy of limiting supply,
in cooperation with Russia and other non-members, marked the end of a
two-year period in which the group pumped at will in a Saudi-led shift
to curb rival output and boost market share, which accelerated a drop in
"I think the extent to which Saudi Arabia bled revenue during 2014-2016
forced them back to the OPEC table before the job of really turning the
screw on U.S. shale and other non-OPEC supply was completed," said David
Fyfe, chief economist at trading firm Gunvor.
"However, the production deal has at least staunched the cash hemorrhage
for now," he said.
The Reuters calculation is based on data from the International Energy
Agency and figures published by OPEC about its production according to
estimates by six secondary sources.
For the price, Reuters used the OPEC basket, an index of the crudes sold
by the member countries.
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A worker checks the valve of an oil pipe at Al-Sheiba oil refinery
in the southern Iraq city of Basra, Iraq, April 17, 2016. REUTERS/Essam
It is intended to illustrate the general trend for oil revenues and does not aim
to give exact estimates of countries' oil export earnings.
STICK WITH IT
OPEC and non-OPEC allies led by Russia initially agreed to cut about 1.8 million
barrels per day (bpd) in the first half of 2017. But with the supply glut
proving slow to shift, they agreed on May 25 to prolong the deal to the first
quarter of 2018.
A drop in prices since then has prompted some OPEC delegates to question whether
the deal is enough, but the group is in no rush to deepen its output cut.
Rising U.S. production has undermined some of the impact of the OPEC-led cuts.
In addition, Libya and Nigeria, two OPEC members exempted from the curbs, have
increased output although not by enough to alter the overall picture of lower
OPEC output in the six-month period.
While OPEC states will welcome the extra revenue, it has not yet plugged budget
deficits that have opened up. To balance its books, Saudi Arabia needs oil
closer to $75 a barrel, asset management firm AB Bernstein estimates.
However, Fyfe of Gunvor said the higher earnings during the first half of this
year will probably give producers sufficient motivation to keep going and even
consider further measures.
Taking Dubai oil as a benchmark, prices so far in 2017 are 25 percent above last
year's $41 average, while OPEC production in the same time is 2 percent, or
700,000 bpd, below 2016's average, he said.
"That arithmetic ought to persuade OPEC and Russia of the value of sticking with
it, maybe cutting sufficient extra barrels to offset Libya and Nigeria increases
and reaping the reward of higher overall 2017 revenues," said Fyfe.
"But the politics of apportioning further cuts will get messy," he added.
Khelil also said he thought OPEC needed to keep on with supply restraint beyond
the expiry of the current deal to protect the increase in income earned this
"It would be in the best interest of OPEC to plan on continuing curtailing
production after the end of March 2018 so as to maintain the 9 to 10 percent
gain in revenues achieved in 2017," he said.
(Editing by Dmitry Zhdannikov and Edmund Blair)
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