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In the OPEC of Time?

Fundamentals cast doubt. Will last week's extension of the current round of oil production cuts to March 2018 by OPEC and 10 non-member countries succeed in pushing up crude prices or even maintaining the current $50/bbl level? So far, the signs suggest not. The output curbs, which were initiated in November 2016, have seen OPEC's output fall from about 34 to 32 million of barrels per day (mbd). However, this has been mostly countered by an increase in production from the US. largely via its shale oil companies whose output is back close to record highs of around 5.5 mbd. With US shale oil rigs still on an upswing and offshore drilling also picking up, it is not unreasonable to envisage total US output climbing to an all-time peak of around 10.3 mbd before the end of the year. No wonder market participants are increasingly leaning against the possibility of oil prices staging a recovery during 2017.

$100 per barrel would still leave Africa short. Our proprietary model of Africa's revenues from oil exports suggest that even if prices were to jump back to 2013 levels of around $100, Africa's exporters would still struggle to make the over $250bn earned in that year. Recent data from the US Energy Information Administration (EIA) indicate that the African members of OPEC (excluding Equatorial Guinea which is not covered by the analysis) have tended to suffer the largest percentage falls in in total export earnings, both in aggregate and on a per capita basis, since 2013. While some of these losses also reflect production disruptions which are on the way to unwinding, our model indicates that another key factor has been a structural decline in US demand for African oil. Nigeria provides a good example. Its exports to the US have slumped dramatically from over 1 mbd in the mid-2000s to around 55,000 today, primarily because its light sweet crude is similar to the output from US shale producers. While rising exports to Asia have helped to offset some of the US contraction, Asia's relatively new refineries mean that much heavier and cheaper grades from the Middle East are often more attractive. The upshot is that even if prices were to surprise on the upside, without a structural shift in US demand patterns African oil income will remain weaker than many governments hope.

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