OPEC cuts could give Indonesia quick reward

OPEC cuts could give Indonesia quick reward

SINGAPORE (Reuters): Crisis stricken Indonesia could reap immediate rewards from its decision to join in with OPEC's plan to cut output and shore up flagging prices, experts said yesterday.

They said Indonesia was certain to gain in the longer term too from the Organization of Petroleum Exporting Countries' agreement in Vienna to cut supply by 1.355 million barrel per day (bpd).

"The government had no alternative but to follow OPEC and hope that this (cut) will raise revenue. In the mid-to-long term it is a good decision," Jakarta-based economist Arif Arryman of the private think-tank Econit said.

Indonesia, Asia's only OPEC member, is contributing 30,000-bpd to the latest cuts, compared to the 70,000-bpd it gave up in March when OPEC initiated the first round of cutbacks totaling 1.245 million bpd.

Indonesian Mines and Energy Minister Kuntoro Mangkusubroto said in Vienna after the deal was announced "we will cut for the good of the market and the good of the (OPEC) organization."

The two rounds of cuts means that from July 1 OPEC plans to cut 2.6 million bpd, including 100,000 bpd from Indonesia.

For Indonesia, the government is giving up a relatively small amount of production this time around compared to the March cuts, but is gaining more in dollar earnings, analysts said.

Prices have fallen slightly since OPEC announced its second round of production cuts on skepticism the group will actually deliver such large cuts.

But prices have risen about $1.50 per barrel in the past 10- days in the run up to the Vienna meeting this week, good news for Indonesia which has seen an 85 percent slump in the value of its currency versus the dollar in the past year.

International benchmark Brent crude fell 31 cents to $13.61 per barrel in London overnight after OPEC announced the latest cuts, but prices had already risen from a cyclical low of $12.15 touched on June 15.

Oil traders said the production cuts were greater than had been expected by the market, so they doubted prices would resume their down trend.

But analysts said Indonesia faces a dilemma in cutting its 1.38 million bpd production because of its dire need for foreign exchange earnings.

"The country is operating under such intense financial pressure, it must be difficult to forgo any oil sales right now which bring in hard currencies," John Russell, managing director of Bangkok-based Petroleum Economics Ltd.

But the government has acknowledged the tough oil market and earlier on yesterday economic czar Ginandjar Kartasasmita announced a downward revision of the government's assumed price for oil to $13 per barrel from $14.50.

"This is because the price of oil is considerably lower in the market," he said.

"The revenue in terms of U.S. dollars will decline for sure but if we use current exchange rates there is quite a significant increase," he said, referring to revenues in rupiah terms.

Arryman said the budget assumed an exchange rate of 6,000 rupiah to one dollar, but the current market value was 14,750.

But the increase in rupiah revenues from crude sales will not be enough to tide the country over the bad times as a lot of its expenditures, including debt servicing and capital goods imports, are in U.S. dollars.

OPEC producers battling low oil prices announced deeper than expected output cuts of almost five percent on Wednesday to drain a disastrous glut of crude.

The producer club agreed to choke petroleum flows by 1.355 million barrels per day (bpd), an OPEC communique said, more than doubling an earlier set of reductions agreed in March.

The following are substantial excerpts from the official OPEC communique issued after a meeting on Wednesday in Vienna to agree oil output cuts.