Oil Market Plays the Kuwaiting Game

But it could be a harbinger of future price-boosting turmoil.

The other big surprise coming out of Doha's freeze fiasco was that oil prices actually proved pretty resilient on Monday, making back most of their initial drop.

Manic Monday

Nymex light, sweet crude oil futures price

Source: Bloomberg

Note: Intraday pricing through April 18.

One reason for this is that, even as OPEC officials were failing to do their jobs, up the coast in Kuwait, oil workers were refusing to do theirs. A strike there has reportedly taken 1.7 million barrels a day of supply off the market. Given that the world's excess supply for the first half of the year is estimated to be about 1.3 million barrels a day, the emirate appears to be doing OPEC's heavy lifting all by itself, and then some.

For this to be meaningful, though, this strike needs to last a lot longer than 2 days. And while strikes can take on a life of their own, there is a powerful incentive to work this one out as quickly as possible.

Kuwait's oil workers are protesting against pay cuts. And while Kuwait's rulers can point to bombed-out oil prices as reason enough to scale back benefits, the revenue they are losing provides a powerful incentive to meet labor's demands halfway. Given the damage inflicted on Kuwait's economy already by the oil crash, it cannot afford an extended standoff.


Kuwait's nominal GDP plunged by 30 percent last year

Source: IMF

Assuming the figure of 1.7 million barrels a day is correct, at $40 each that amounts to $68 million of lost revenue per day. Even if the strike lasted only three months, that would add up to $6.1 billion of forgone revenue, equivalent to fully 5 percent of Kuwait's annual GDP. That provides a lot of room for concessions, which suggests the strike will last weeks rather than months.

The oil bulls can draw some comfort from Kuwait's impromptu cut on a broader basis, though.

The real heavy lifting in terms of rebalancing supply and demand is being done -- in the regular, market-driven way -- by companies in the U.S. and elsewhere cutting back spending in the face of low prices. This, however, takes time.

And while Doha's delegates couldn't deliver divine intervention to speed this process along, Kuwait's problems suggest the cartel may end up providing a boost to prices anyway -- just not in the way it might want.

Kuwait's finances actually look to be in relatively better shape than those of most fellow OPEC members.

OPEC's Haves and Have-Nots

Sovereign wealth fund assets at year-end 2015

Source: RBC Capital Markets

Countries such as Venezuela and Nigeria look far more vulnerable to disruption than the Persian Gulf monarchies. But who knows? Even Saudi Arabia is under enough pressure that it is pushing potentially radical economic reforms, with all the attendant scope for political upheaval in that fractious corner of the globe. Kuwait may not be the answer to oil bulls' prayers. But it may be the harbinger of bigger shocks to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning in San Francisco at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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