Opec’s ‘fragile five’ face rising cost in the fight for oil market share
The risks of worsening political turmoil rises in Opec's most vulnerable nationsAlgeria, Iraq, Libya, Nigeria and Venezuela
The costs of Opec’s plan to protect members’ share of the oil market by out-producing rivals are mounting.
As oil prices slump to six-year lows, the risks of worsening political turmoil are rising in the organization’s most vulnerable nations. This includes Algeria, Iraq, Libya, Nigeria and Venezuela, a group dubbed the ‘Fragile Five’ by RBC Capital Markets Ltd.
The pain doesn’t end there. With even Saudi Arabia facing its biggest budget deficit in almost three decades, consultant Petromatrix GmbH says the plan to produce at full throttle was a “strategic mistake."
Oil prices slumped to near $40 a barrel in New York on 14 August as a global surplus endures almost nine months after the Organization of Petroleum Exporting Countries (Opec) unveiled its plan to squeeze rivals led by US shale drillers. American production has stubbornly refused to buckle.
Some Opec members may start asking whether the pain’s been worth it, said Christopher Louney, an analyst at RBC Capital Markets Llc.
Venezuela “appears poised for a near-term crisis" amid protests and shortages of basic goods as the country heads for parliamentary elections in December, according to RBC analysts Louney and Helima Croft. The cost of insuring the government’s five-year bonds has rebounded to near a 12-year high.
While promises of reform from newly elected president Muhammadu Buhari have bought Nigeria time, the grace period won’t last indefinitely, RBC says. The naira has weakened 7.8% against the dollar this year, pushing inflation outside the central bank’s upper target of 9%, and the recovery of Nigeria’s depleted cash reserves has hit a plateau.
Libya’s risks of further political chaos are among the highest in the organization, matched only by Iraq, according to RBC. Threats have also intensified in Algeria as it faces “a looming leadership transition," spurring the country last week to suggest an emergency Opec meeting. The economies of both North African nations tipped into a current account deficits last year after more than a decade of surpluses.
As chief architect of Opec’s new policy, Saudi Arabia has the financial resources to absorb the short-term pain involved. These include a budget deficit for 2015 that the International Monetary Fund (IMF) estimates at 20% of gross domestic product (GDP), and the whittling away of $80 billion in foreign currency reserves. Bloomberg
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