May 18, 2017 10:00 am JST

OPEC leans toward extending output cuts another nine months

Soft prices have the cartel worried, but a bigger squeeze looks unlikely

KAZUHIRO KIDA, Nikkei staff writer

Omani Oil Minister Mohammed bin Hamad al-Rumhy, left, greets a representative of Kuwait Oil Co. at the OPEC 2nd Joint Ministerial Monitoring Committee meeting in Kuwait City on March 26.

LONDON Members of OPEC are expected on May 25 to extend a deal with Russia and other major non-OPEC producers aimed at curtailing oil output.

The new agreement will run for nine months through March 2018, according to people familiar with the matter. It will be signed at the upcoming meeting of the oil cartel in Vienna. Saudi Arabia, the biggest oil producer in OPEC, and Russia agreed to extend the output cuts on May 15 to keep prices firm.

Saudi Arabian Energy, Industry and Mineral Resources Minister Khalid al-Falih and Russian Energy Minister Alexander Novak agreed in Beijing to continue reining in production. In a joint statement, the two ministers said they will "do whatever it takes" to stabilize the market.

With the unusual agreement between Saudi Arabia and Russia before OPEC's general meeting, the two countries demonstrated their resolve to mop up a global crude oil glut.

OPEC and other big oil producers began coordinated production cutbacks in January. The initial six-month deal expires at the end of June. But global crude oil inventories have not fallen as expected due to higher output of shale oil in North America, and crude prices were hovering around $50 per barrel before the Saudi-Russia agreement. OPEC and non-OPEC oil producers appear content to maintain production at current levels, and seem cautious about further cuts.

MINDING BUDGETS Saudi Arabia is concerned about its finances. The kingdom's revenues for the January-March quarter totaled 144.1 billion riyal ($38.4 billion), up 72% on the year, largely because its oil revenue rose 115% over the period to 112 billion riyal. If its oil revenue falls due to sluggish crude prices since April, it may have to cut public spending again. This is a perennial problem for the Saudi royal family, which relies on oil money to buy public support.

Non-OPEC producers that have taken part in the output cuts are also facing financial difficulties. S&P Global, a U.S. credit ratings specialist, on May 12 cut its debt rating on Oman, a non-OPEC producer, to BB+, one notch lower than before and a speculative grade. Some producers raise funds by issuing government bonds in overseas markets to make up for budget shortfalls. Low crude prices could make their fundraising even more difficult.

Production from the 13-member OPEC cartel totaled 31.73 million barrels per day in April, down 20,000 barrels on the month. Nigeria and Libya were exempt from the cuts. The other 11 members slashed their production by a total of around 1.3 million barrels per day from standard levels in April, exceeding the reduction target by 11%.

But prices have not responded because shale-oil producers have made up the difference. On May 11, OPEC raised its forecast for crude oil supply by non-OPEC members for 2017 to 58.25 million barrels per day, 370,000 barrels more than before. It also lowered its demand outlook for OPEC crude in 2017 to 31.92 million barrels per day, down 300,000 barrels from its estimate in April.

Some OPEC members are calling for further cuts. The May 12 online edition of The Wall Street Journal reported that OPEC member Venezuela had proposed slashing output, but that other members had not agreed.

Many OPEC members hope to curtail output by bringing more non-OPEC producers into the deal. Egypt and Turkmenistan, oil producers that have not taken part in the collective reduction effort so far, are expected to attend the May 25 meeting as observers. West African producer Equatorial Guinea is seeking to join the cartel.

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