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Oil exporters facing difficult outlook, watch for rising instability

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The North Africa Journal- June 29, 2017 – By Arezki Daoud:  The outlook for the oil market, from the perspective of exporters looks grim. This situation will likely exacerbate the security, social and political tensions in various exporting countries that MEA Risk LLC tracks, including the populous nations of Nigeria, Algeria and even small population nations like Mozambique. Ironically, as low prices are expected to extend well into 2018 and possibly beyond, these nations are preparing for their own presidential elections. What’s at the stake for the regimes in those countries is not only the stability of the countries, but their own regime survival considering that unlike previous elections, there will be not enough money to buy peace. Austerity measures have been enacted in all of these nations, and with oil prices set to remain low, politicians won’t be able to incentivize the populations come the next election cycle.

So what’s ahead for the oil market? The International Energy Agency (IEA) reported last week that while OPEC is trying to contain its own production, the output of non-members would grow in 2018, making any effort inefficient. This increase in oil supply is expected to outpace demand, resulting in low prices next year. IEA says “for total non-OPEC production, we expect output to grow by 700,000 barrels per day (b/d) this year, but our first outlook for 2018 makes sobering reading for those producers looking to restrain supply. In 2018, we expect non-OPEC production to grow by 1.5 million b/d, which is slightly more than the expected increase in global demand.” The price of Brent crude averaged $47.30 per barrel on Wednesday 28 June 2017, largely as a result of an abundance of oil, with inventories across the world’s top economies up in April by 18.6 million barrels to 3.045 billion of barrels. IEA attributes the rise to higher refinery output and imports, with stocks at 292 million barrels above the five-year average.

While production and inventories are increasing, demand growth in the key markets of China and Europe is slowing, causing the deficit to narrow at a projected volume of 500,000 b/d from a prior estimate of 700,000. In order to cut global inventory levels, producers, which include OPEC and many leading non-OPEC exporters agreed to cut 1.8 million b/d until March 2018. But IEA warns that this may not be enough, noting that “Based on our current outlook for 2017 and 2018, incorporating the scenario that OPEC countries continue to comply with their output agreement, stocks might not fall to the desired level until close to the expiry of the agreement in March 2018.”

OPEC and other Exporters will be Forced to Trim More

The weak performance of the market from the perspective of exporters is indicative of the OPEC’s inability to influence outcome by reducing production. In this context, geopolitics plays a substantial role in how OPEC works, with archenemies Iran and Saudi Arabia being members of the cartel, threatening OPEC’s cohesion.

In addition to the animosity between Iran and Saudi Arabia, exporters continue to face a growing US production, in particular with the acceleration of shale gas output, with a more-than-doubling of the number of drilling rigs, hence compromising any recovery of oil prices. U.S. crude oil production is now more than 9.3 million b/d, up about 850,000 b/d a day in September 2016. But as OPEC continues its efforts to contain production to lower inventories, these efforts are not likely to produce their intended goals. Kuwait’s Oil Minister, Essam Al-Marzouk, has said the compliance of OPEC members in reducing output in May reached 106%, its highest level since January 2017. But that did not stop prices from falling, prompting fear of a repeat of the pre-June 2014 when prices reached rock bottom. Al-Marzouk insisted that the ongoing decline in prices has nothing to do with any alleged divisions and issues among the OPEC members and the dozen other exporting countries who agreed on containing production. The US is often singled out as the culprit, considering that the number of wells there has been on the constant rise. The others that are marginally blamed for the weak oil prices are Nigeria and Libya, two OPEC countries that have been exempted from the reduction in oil production to enable them to deal with their respective political crises.

As OPEC and other exporters face the American onslaught, they are considering another reduction in member quotas, according the Iranian Oil Minister Bijan Zanganeh, just like IEA suggested.

Impact on Exporters with Large Populations

The road ahead for oil exporters looks compromised this and next year. For countries facing growing social unrest due to austerity measures as a result of reduced oil income, the political landscape will be challenged by approaching elections. Without a hope of a recovery soon, the governments of countries with large populations like Algeria and Nigeria face an explosive situation that could have a major influence on their 2019 presidential elections. If the IEA oil forecasts well into 2018, and shortly before elections, hold and prove somewhat correct, we must anticipate a substantial increase in tension in the populous exporting countries. The situation for many is already dire on the political front. Algeria for example has a president that is incapacitated due to a prolonged illness and power remains concentrated in the hands of his aides in an opaque manner. Previous, current and any future Prime Ministers and cabinets, up to the 2019 elections, will not have the sufficient popular backing to make their decisions legitimate in the eyes of voters. With a dismal turnout during the most recent legislative elections, Algeria is essentially moving ahead without proper governing leaders.

Nigeria too has a serious leadership crisis with President Buhari absent for almost 60 days to deal with a mysterious illness. Buhari relocated to the UK for his medical leave and all signs look bad as to the state of his health. Meanwhile the country is mired with a series of political, social and economic crises that include politics that is dividing north and south, the permanent terror threat of Boko Haram, the widespread violence due to the nomadic herders, and an economy that has been shrinking each past quarters. And just like Algeria, Nigeria has its presidential election in 2019, which promise to be rocky.

Even among non-OPEC countries, many are struggling to bring discipline to their political and economic environments. The Southern Africa country of Mozambique, a country that has had a civil war and has peace talks that have yet to bear fruit, is launching a major gas project with giants like ENI on board. The country has been facing unprecedented financial troubles due to loans it contracted but never disclosed, forcing its international partners to withdraw support. The development of the Rovuma gas basin in the north of the country is seen as a major project aimed at stimulating economic activity. But with oil prices where they stand today and where they are headed, it is unclear to what extent oil and gas investors will really end up committing money in the Mozambican oil sector. Anadarko, which is a major participant to the development of Rovuma, has yet to announce its final investment decision because it is probably taking time to assess where consumption and production are headed. And then there are the never ending destabilized Middle East, with the Sunni-Shia, and the Sunni-Sunni divisions tearing the region apart.

But all of that probably pales in comparison to what the Americans have been doing and what they are planning. Despite a major boost to the sector during the Obama Administration, which recorded a near 32% increase in production from 2009 to 2015, the Trump Administration still accusing the previous White House of limiting the American fossil energy production capacity toward what US Energy Secretary Rick Perry calls “energy dominance.” Perry insisted that the Trump administration is “ending the bureaucratic blockade that has hindered American energy creation.” While the Trump Administration is working on easing administrative procedures and allowing more exploration and production to take place, despite uproar in the environmental movement, the oil and gas sector has made substantial strides in the use of technology and has been consistently working on reducing cost through supply chain efficiencies and reduction of staff. The assumptions made by many exporters that the US oil industry will feel the pain if prices fall below $70 a barrel is proven to be wrong.

We assume that the search for more efficiencies and a new Trump energy policy could have an even greater negative impact on oil prices going forward, and that does not bode well for large populous OPEC nations.

As we look at 2018 and 2019, there is ample evidence that stability is not likely to return in many oil and gas exporting countries. This is not an issue of uncertainty per se, but there is clear certainty that the abundance of oil, the lack of robust economic growth in China and Europe, the boost in production in the US, are among the many factors that guarantee a difficult period ahead for many.

Profile photo of Arezki Daoud

Arezki Daoud is The North Africa Journal Editor and MEA Risk LLC’s Chief Executive and Lead Analyst. At the North Africa Journal Arezki oversees content development and sets the editorial policies and guidelines. Arezki is an expert on African affairs, with primary focus on the Maghreb, Sahel and Egypt. His coverage of the region spans from security and defense to industrial and economic issues. His expertise includes the energy sector and doing business in the region. At MEA Risk, Arezki overseas all aspects of the company’s development, from the research agenda to growth strategy and day-to-day business activity. Arezki brings a wealth of skills. After college, he worked for oil company Sonatrach, then held research, forecasting and consulting positions for the likes of Harvard University, IDG and IDC. Arezki can be reached at daoud@north-africa.com, at US+508-981-6937 or via Skype at arezki.daoud