OPEC’s ‘Fragile Five’ Face Rising Cost in the Fight for Oil Market Share

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 Aug. 14 as a global surplus endures almost nine months after the Organization of Petroleum Exporting Countries unveiled its plan to squeeze rivals led by U.S. shale drillers. American production has stubbornly refused to buckle.

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 MuhammaduBuhari have bought Nigeria time, the grace period won’t last indefinitely, RBC says. The naira has weakened 7.8 percent against the dollar this year, pushing inflation outside the central bank’s upper target of 9 percent, 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 estimates at 20 percent of gross domestic product, and the whittling away of $80 billion in foreign currency reserves. Here’s Louney again on the Middle East’s most important producer:

Drop in Commodity Currencies Extends Global Oil Glut

Drillers from Russia to Canada, the world’s second- and fourth-biggest oil producers, sell crude in U.S. dollars while paying most operating costs in local currencies. The Canadian dollar dropped to an 11-year low against its U.S. counterpart this month while the Russian ruble trades near a six-month low.

Global oil supply has proven resilient. A 60 percent decline in U.S. dollar prices since June 2014 hasn’t curbed U.S. production, which is near the highest level in four decades. Iraq is producing at a record pace and Russian oil output reached a post-Soviet high this year. The world’s oil glut will last through 2016, the International Energy Agency said in an Aug. 12 report.

Double Dip

Oil prices are experiencing a “double dip” and could extend losses for a further 18 months, according to a Bank of America Corp. report dated July 24. $60.

Lower Ruble

The risks to Russia’s economy triggered by the slide in oil prices will be mitigated by the decline in the ruble, Vladimir Osakovskiy, the chief Russia economist at Bank of America in Moscow, said in July.

OAO Rosneft, the world’s largest traded oil producer, increased drilling by 27 percent in the first seven months of the year, the company said Aug. 13. The nation’s exports remain just as profitable as they were a year ago when the oil price was about $100, according to Citigroup Inc.

A U.S. rate gain, possible as early as September, would bolster the dollar and reduce the appeal of commodities priced in the American currency as a store of value. Futures show a 48 percent chance the Fed will raise borrowing costs at its next meeting on Sept. 16-17.

Algeria Calls for Non-OPEC Output Cut to Stop Oil Price Fall

The Organization of Petroleum Exporting Countries can do little to halt the oil price decline on its own and needs producers from outside the group to help in reducing global supplies, Algeria’s energy minister said.

“A supply reduction by OPEC alone cannot really guarantee a return to oil market stability,” Salah Khebri said at an event in Algiers, according to Liberte newspaper. As the 12-member group of crude producing nations accounts for 40 percent of the world’s supply, “there should be steps taken within OPEC and with non-OPECs.”

Khebri called earlier this month for an OPEC emergency meeting because of the continued decline in oil prices, which dropped by half from a year ago amid rising production from the U.S. Oil and gas sales account for about 60 percent of Algeria’s budget revenue and 95 percent of its export income, according to the International Monetary Fund.

Algeria’s initiative to coordinate an OPEC response to tumbling crude prices had the backing of cash-strapped fellow members Libya and Venezuela. It was met with no public response from OPEC’s top producer Saudi Arabia, which engineered at the Nov. 27 meeting of the group a shift in its policy away from the historic role of managing prices by adjusting supply.

Saudi Arabia instead lobbied OPEC to preserve market share in the hope that crude prices would recover when higher cost producers such as U.S. shale companies are forced out of the market. The group stuck to the same policy at its last meeting in June.

Algeria’s financial savings, including government spending on housing and subsidies on fuels and food, has been instrumental in shielding the country of 40 million from strife that swept through the Middle East and North Africa since 2011, toppling the rulers of Yemen, Egypt and neighboring Libya.

Algeria’s foreign reserves totaled $158.4 billion in March, 18 percent lower than a year earlier, according to the latest available data. With a population smaller than Algeria and oil production at 10.5 million barrels a day, Saudi Arabia’s reserves dropped 8 percent over the same period to about $667 billion.