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

Crude's at a six-year low and the political risks are mounting

Oil Market's Response to Global Supply and Demand

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.

This chart shows how the budget position of Saudi Arabia and other key OPEC members has quickly worsened:

Some OPEC members may start asking whether the pain's been worth it,  said Christopher Louney, an analyst at RBC Capital Markets LLC.

"If we haven't got a recovery by the mid-point of next year, that's when the questions will arise... has the strategy paid off or not, and will there need to be a change in strategy."

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 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.

Crude-oil futures fell as much as 1.1 percent on Wednesday in New York, and traded down 0.5 percent at $42.39 a barrel as of 7:46 a.m. local time. That's less than half the price a year ago. 

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:

"They do still have FX reserves, they do still have sovereign wealth funds, they do have that cushion to sit on for a while. But the question is: When we get to that point where the recovery to $70 is supposed to happen, and we're not there? That's when it's going to get re-evaluated."

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