Key OPEC countries are facing political and financial strains that are starting to affect crude production and could provide the market with much-needed price support, analysts said Monday.
After rallying for several weeks, oil prices fell Monday as U.S. crude inventories continue to climb and Iran vowed to boost production despite calls for a freeze among members of the Organization of Petroleum Exporting Countries.
But as traders remain fixated on the off-again, on-again talk of a production deal among OPEC members and Russia, major exporters such as Nigeria and Venezuela are having trouble maintaining existing production, while Iraq's growth trajectory is in question, Helima Croft, commodity strategist for Royal Bank of Canada's investment arm in New York, said in an interview.
"We're starting to get mounting production outages that are real and they may not be able to bring this production back on easily," Ms. Croft said. "No one is really focused on that right now. This is where the high inventories lull people and make it seem like it is not such a big deal. But if these countries continue to get worse, that is going to tighten the market."
Hard-pressed producers in Canada would clearly gain from further political turmoil in economic-battered OPEC countries. They "might be rescued by a series of involuntary outages," the RBC analyst said.
In Iraq, the main export pipeline from the Kurdish north through Turkey – which had been carrying up to 500,000 barrels a day – was offline recently. And it may be more vulnerable as the Turkish regime looks to punish the Kurds for a car bombing in the capital last weekend. In Nigeria, militants in the Niger Delta are back in action as a result of a government crackdown on corruption, attacking a subsea section of the Forcados pipeline with the loss of 300,000 b/d. In Venezuela, there are signs that production is beginning to fall as the state-owned company is starved for cash.
However, oil markets remain oversupplied and traders are shrugging off news of problems within OPEC.
"For now, it's going to take a lot more [news of disruptions] to get traction in the market," Greg Priddy, an analyst at Eurasia Group consultancy, said Monday.
On Monday, the North American benchmark, West Texas intermediate (WTI), fell 3.5 per cent, or $1.32 (U.S.) to $37.18 a barrel, after Iran spurned the production freeze proposal and U.S. market intelligence firm Genscape reported significant inventory buildup at Cushing, Okla., where WTI prices are set.
Analysts suggest the recent rally has run its course. It was spurred by a weakened American dollar, signs of production declines in the U.S. shale oil sector and hints of a possible Russia-OPEC production deal.
OPEC pumped 32.3 million b/d in February, the cartel reported in its monthly update. That's down about 175,000 b/d from January, mainly due to outages in Iraq and Nigeria. Saudi Arabia said it kept output in February steady at 10.2 million b/d. Mr. Priddy said he expects that growing Iranian production – and even residual growth in Iraq – would more than offset other OPEC members' production losses this year.
Still, prices did get a boost in February due to the outages in Nigeria and Iraq, Citigroup analysts said in a report. They added that there is a high risk of deepening problems in Iraq, Nigeria and Venezuela.
"Low prices are exacerbating internal instability in oil-producing countries," the analysts wrote in a report Monday. "Fragmentation risk is looming large in both Iraq and Nigeria, and civil violence and political uncertainty are increasing in debt-laden and fiscally challenged Venezuela. Combined output of some 8.5 [million] b/d in these three countries looks more at risk than at any time in the recent past."
RBC's Ms. Croft said even the wealthy Persian Gulf states are feeling the strain. Several, including Saudi Arabia and Qatar, have had their creditworthiness downgraded by rating agencies, boosting the cost of borrowing at a time when revenues are falling well short of fiscal requirements in most countries. She said the Saudis' support for a production freeze "was the first sign of capitulation among the more flush OPEC producers."
She is paying particular attention to the "fragile five" countries that require a price of $100 (U.S.) a barrel to avoid deficits and have large, potentially restive populations – Libya, Venezuela, Iraq, Algeria and Nigeria. The Saudis have greater financial capacity but are not immune to political risk, Ms. Croft said. "If you buy loyalty with prosperity, and you don't have prosperity, then loyalty becomes questionable."