High risk strategy

Today’s IEA Oil Market Report sees no global crude stock draw before the fourth quarter of 2016 — and even that calculation is predicated on no return of extra Iranian barrels. A hike in the forecast call on Opec crude next year is cold comfort — the call would still be below recent production by the group’s members, and the price weakness would far outweigh the volume gain.

The Mideast Gulf Arab Opec members — corralled and chivvied along by Riyadh — have said that they are in for the long haul — market share will be reclaimed. The Saudis have said that they can take the price pain for four years. But even they are having to look for alternative sources of financing, hence yesterday’s $5bn bond issue, the first of a steady flow. And Kuwaitis may gulp at the announcement that first-quarter oil export revenues were down 46pc on the year.

If the governments of Saudi Arabia, Kuwait, the UAE and Qatar are exercised by questions of how to avert popular discontent amid lower oil prices, it’s worth considering the position in less financially well-endowed Opec member states.

Nigerian president Muhammadu Buhari swept into office with promises of reform, efficiency drives, and an end to corruption. His broom has already swept through NNPC. Perhaps crashing oil revenues will spur him on and the Nigerian oil sector will emerge less dysfunctional and more beneficial to the population at large. Early days yet, but Buhari is far from the first Nigerian president to promise much and deliver little and the danger must be acknowledged that a prolonged period of low prices will hurl Africa’s most populous nation towards further fragmentation.

Baghdad’s row with the Kurdish Regional Government (KRG) over payments for oil produced and exported from northern Iraq precedes the price crash and is interwoven with the politics of federalism and separatism. But Baghdad’s plea that it doesn’t have the money that the KRG says it is owed has some credence. And that lack of payment has seen the Kurds move closer to de facto economic independence. In the past two months, the flow of crude to Somo tanks at Ceyhan has slowed to a trickle as Erbil exports on its own account. Low oil prices are creating the conditions for a break-up of Iraq.

Algeria is tightening its belt and trying to diversify sources of finance but the government is acutely aware of the dangers of cutting public subsidies. The country was little troubled by the Arab Spring, in part because of oil and gas revenues, in part because of the power of the security apparatus, and perhaps in part because of exhaustion from the blood-letting of the civil war of the 1990s. Oil revenues have tumbled and industry and commerce have taken a downturn. The disaster next door that is Libya is a reminder of how bad things could be.

Then there is Venezuela — increasingly fractious and cash-strapped — or Angola with its own social cleavages and development needs. Ironically, Iran, having been through the wringer of sanctions and now having the prospect of coming out the other side may be looking forward to more rather than less stability in coming months.

The longer prices stay low, the greater the danger that the recovery will not be an orderly result of a slow reduction of US shale production but a jagged upward move as an Opec producer spirals into chaos. Riyadh is playing a high risk game but does it have an alternative?

For more information, please contact OilBlog@argusmedia.com