Mahakam Block (Image Credit : Special Task Force for Upstream Oil and Gas)

JAKARTA (TheInsiderStories)–The oil price touched its lowest level in seven weeks after the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producers sought to raise output.

Brent Crude dropped by 1.44 points or 1.88 per cent to US$75 per barrel at 12.28, while WTI Crude Oil decreased by 1.67 points or 2.46 per cent to US$66.21 per barrel at 12.32.

The drop erases three weeks of oil price gains, driven by concerns over a shortage risk in Venezuela production due to the presidential election and the expectation of US sanction against Iran.

Non-OPEC Russian Energy Minister Alexander Noval on Friday (25/05) met OPEC leader Saudi Arabian Energy Minister Khalid al-Falih in St. Petersburg, Russia. They were discussing to raise oil production by around 1 million barrel per day to compensate the fall production in Venezuela and potential disruption of oil exports from Iran.

OPEC and non-OPEC ministers will meet in Vienna on June 22-23 to take the final decision about the oil production hike. However, it is unclear which countries are able to raise production.

This increase of production will end 17-months of supply control amid concern that price rally has gone too far at US$80.50 per barrel earlier in May, the highest since 2014. The production cut implemented since 2017 to boost the oil price that touched below US$30 per barrel in 2016. In an agreement earlier this year, OPEC and Russia agreed to continue production cuts of 1.8 million barrel oil per day by the end of the year.

The Saudi Arabia and Russia discussion exacerbated by Baker Hughes who reported an increase in US oil wells totaling 15 units in the past week. It increased the number of active wells in the US to 859 units, which is the highest level since March 2015.

The increasing number of active wells is an indication of an increased oil production in the future. US weekly oil production still records strong at 10.725 million barrel per day.

Impact to Indonesia

Even though oil price record dropped in recent days, it still far above the 2018 state budget assumption of US$48 per barrel. Finance Minister Sri Mulyani earlier said an increase by US$1 per barrel in oil price could raise state revenue by Rp1.1 trillion. With the current price of US$80 per barrel, Indonesia is highly likely to surpass the current oil & gas revenue target of Rp83.5 trillion. It consists of Rp80.3 trillion tax revenue and Rp3.2 trillion of non-tax revenue

However, the oil price rise also brings negative effect to the state budget due to the increase in subsidy budget. It does not only affect the fuel subsidy but also the electricity as many power plants generated by fuel and LPG subsidy as the oil price usually affects LPG price. The government set Rp46.3 trillion in fuel subsidy in 2018 state budget, of which Rp7.8 trillion is for diesel subsidy. The Coordinating Minister for Economics Affairs Darmin Nasution earlier planned to increase subsidy spending in the state budget by Rp10 trillion.

Email: fauzulmuna@theinsiderstories.com

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