"Fragile Five" OPEC Producers Facing Economic Collapse: RBC Capital Markets

Friday April 1, 2016

RBC Capital Markets believes that the oil-driven economies of Algeria, Iraq, Libya, Nigeria, and Venezuela will collapse if the oil market doesn't soon stabilize.

Helima Croft, global head of commodity strategy for RBC, states in a report carried by the Financial Post that these five Organization of the Petroleum Exporting Countries (OPEC) producers "are on the precipice of a major crisis amid the current low oil price environment."

She writes that Algeria's fiscal deficit has nearly doubled to 16 percent of GDP on lower hydrocarbon revenues, and that high oil prices "are a key tool for the regime led by Abdelaziz Bouteflika to control its restive population and rule the country with an iron fist."

Of Iraq, Croft writes, "Northern Iraqi exports are increasingly at risk due to trouble in neighbouring Turkey, as well as dysfunctional Iraqi political dynamics"; as for Libya, its oil and gas industry has been decimated by civil war, and its GDP is expected to fall to $42 billion this year, compared to $72 billion in 2012.

Croft believes Nigeria's main problem is that "the government appears to be on course for a head on collision with armed militants in the oil region," while Venezuela's inflation rate "is expected to skyrocket to 720 percent this year…..the country needs much higher oil prices to avoid a complete economic meltdown."

The Oil breakeven price for the five nations was said to be $114.80, $77.00, $68.80, $122.70, and $117.50 per barrel for Algeria, Iraq, Libya, Nigeria, and Venezuela respectively.

Croft concludes that the social, political, and terrorism-related problems plaguing the "fragile five" countries "could either lead to a regime change or create great instability that could knock out their oil production, leading to an oil-supply shock."

Such a shock would undoubtedly then be felt throughout the global bunker markets. 

Presumably, the leaders of these countries take some comfort in recent statements made by Wood Mackenzie, which believes the annual average oil price for 2016 will "be lower than 2015 and then recover in 2017, reflecting large oversupply and high stock levels during the first half of 2016."