Oil-Price War Batters Poorer OPEC Members as Coronavirus Looms

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With Saudi Arabia preparing to flood oil markets with a surge of output beginning as early as Wednesday, several of its OPEC brethren are cutting expenditures as they struggle to respond to the ravages of the kingdom’s oil-price war with Russia.

Lacking cash resources and the ability to increase output to fight in the oil-market conflict, the governments of Iran, Iraq, Algeria, Libya, Angola and Venezuela are considering major cuts to spending, even as they confront the coronavirus pandemic.

“The cost of this standoff will be especially high for the most imperiled OPEC producers,” said Helima Croft, the chief commodities strategist at RBC Capital Markets. Ms. Croft calls these nations the “shaky six” because of their combination of oil-production challenges, threats and big national budgets.

Global benchmark oil has fallen 55% in March to $22.76 a barrel as Saudi Arabia, the world’s biggest oil exporter, cut prices and said it would boost production in an attempt to steal market share from Russia. The kingdom’s new approach followed the collapse of its three-year coordination with Russia as part of the so-called OPEC+ alliance. Iraq and Algeria have been trying to bring delegates from Saudi Arabia and Russia back to the negotiating table, but their efforts have so far been unsuccessful.

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income for many members of the Organization of the Petroleum Exporting Countries is set to fall by 50% to 85% in 2020, reaching the lowest level in more than two decades, according to an International Energy Agency analysis. “This is likely to have major social and economic consequences, notably for public sector spending in vital areas such as health care and education,” the agency said.

Oil and gas income for many OPEC members is poised to reach the lowest level in more than two decades, according to the International Energy Agency.

Photo:

leonhard foeger/Reuters

Iraq, which is preparing to host OPEC’s 60th anniversary gathering in September, is the most prominent casualty of the oil-price war. In a country already rocked by conflict and protests, the need to cut spending because of the oil rout is an “imminent danger to the nation and its future,” warned Modher Mohammed Saleh, an economic adviser to the Iraqi prime minister’s office.

The country is ill-equipped to compete in the Saudi-Russian market struggle. Saudi Arabia has the ability to add 2.5 million barrels of daily production to offset lower oil prices—a move Iraq couldn’t  carry out without the help of foreign companies. And Russia’s diversified economy and extensive cash reserves mean it can cope with oil prices as low as $25 a barrel. Iraq needs prices more than twice that amount to cover government spending.

Iraq can only boost its output by 310,000 barrels a day to 4.9 million barrels a day, according to the IEA. That is only a fraction of Riyadh’s planned supply expansion, and even that small flexibility is called into question as the coronavirus pandemic and the oil rout dent output and investment.

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In recent weeks, the Gharraf field, in oil-rich southern Iraq, halted its 100,000-barrels-a-day production when its operator, Malaysia’s

Petronas,

repatriated its workers to Kuala Lumpur over coronavirus fears.

Meanwhile, in Iraqi Kurdistan, which generates a fifth of the country’s crude output, coronavirus-related on staff movements along with the drop in oil prices have halted production and exploration. Norway’s

DNO

said it was cutting production at the region’s biggest field and reduced the number of rigs deployed there from six to two.

Oil spending is being curtailed all over Iraq. Authorities last week asked international oil companies to find ways to cut costs on joint projects by 30%, according to an Iraqi government adviser and an oil contractor.

Baghdad also has to keep vast militias on its payroll to fight an Islamist insurgency that once controlled much of its western regions. Meanwhile, protests last year over corruption and lack of public services have forced the cabinet of Prime Minister Adel Abdul-Mahdi to resign and stay as caretaker.

The situation faced by Iraq has led to hostility toward other producers flooding the market. “The Saudis made a mess of the oil price,” said the Iraqi-government adviser. “They did not consult Iraq and OPEC. Now they will take the [market] share of Iraq.”

Algeria, for its part, can ill afford to enter an oil-price battle. It requires oil prices of more than $92 per barrel to fund its government programs adequately. The North African nation was rocked by protests over deteriorating living standards last year, leading to the resignation of Abdelaziz Bouteflika had been in office for 20 years.

Last week, Algeria’s new leadership slashed spending by $24 billion, including 30% in operating budget expenses. The austerity plan includes halving spending on oil and gas projects. The measure could accelerate the of production , which has already fallen by 100,000 barrels a day in four years because of harsh contractual conditions.

If prices remain low, “within two to three years, the country will be under the tutelage” of the International Monetary Fund, a government adviser said.

Even Africa’s largest oil producer, Nigeria, has fallen victim to the price war. It cut prices for its main grades of crude by $5 a barrel last week, said oil traders, and has vowed to boost output. But with halted and coronavirus-related lockdowns around the world, demand for oil is collapsing along with prices—and the country only has the capacity to increase its supplies by 120,000 barrels a day, 5% of what Saudi Arabia could accomplish, according to the IEA.

If its oil were to be unsold, Nigeria would have no more than the equivalent of two days of production in storage capacity, according to IHS Markit. And at its own production price of around $29.60 a barrel, its oil is more costly to pump on average than international prices of about $25 a barrel, Rystad data shows.

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Roger Diwan, IHS’s vice president of financial services, said he expects Nigeria to be among the first to have to reduce production.

The country also lacks the fiscal reserves enjoyed by Saudi Arabia. According to Fitch Ratings, Nigeria’s breakeven oil price, the oil price required to balance the government’s budget, is $57 a barrel, the highest among major oil producers in the Middle East and Africa.

Nigeria, which like Iraq has been fighting an Islamist insurgency, is trying to find ways to cut the size of its record $34.6 billion budget, according to its finance ministry.

Meanwhile, Venezuela and Iran, hit by U.S. sanctions, have sought $5 billion each in emergency funds from the IMF. Venezuela has lost half of its output because of U.S. restrictions on its oil, which is very low quality and even more expensive to pump than in the U.S.

“If that continues, it won’t make sense for Venezuela to produce, it will be cheaper to import crude,” said a Venezuelan oil trader.

Write to Benoit Faucon at benoit.faucon@wsj.com, Isabel Coles at isabel.coles@wsj.com and Summer Said at summer.said@wsj.com

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Source: Investing.com

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