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Wednesday, January 13, 2016

Oil Prices at $30 Bend Nations, But Which Ones Could Break?

Petrodollars are rapidly turning into petropennies. As oil prices flirt with the $30-a-barrel level, a key question becomes whether producing nations can continue to stand the pain.

Assessing the economic and political risks to major exporters is far from straightforward. Depending on whom you ask, the crude price large producers such as Russia, Saudi Arabia, Iran, and Venezuela require to balance their budgets is anywhere from the high double digits to low triple digit dollars per barrel.

Such prices are now a distant memory. Oil prices on Tuesday again slid. Brent, the global benchmark, is now down around 18% since the year’s start. West Texas Intermediate, the U.S. benchmark, briefly broke through the psychologically significant $30 level Tuesday, while key Middle Eastern and Russian varieties already are below $30.

If prices stay lower for longer, as looks more likely, questions of solvency and even regime change will percolate. That is an issue for investors in sovereign debt and currencies, but also for those trying to forecast the next leg in crude’s course and could test the resolve of countries concerned first and foremost with market share. The panic is palpable: Nigeria’s oil minister called for an emergency meeting of the Organization of the Petroleum Exporting Countries possibly within the next month.

The Wall Street Journal
Credit ratings might seem like a good place to start assessing the risk of even more financially secure producers. Gulf monarchies such as Saudi Arabia, Kuwait, Qatar and the United Arab Emirates all have fairly high double-A ratings from Fitch. They can dip further into reserves or borrow internationally. Russia, by contrast, is at triple-B-minus, Venezuela sports an abysmal triple-C and Iran remains under international sanctions.

But politics matter too. Iran’s economic growth actually is improving sharply as sanctions are eased. The Islamic Republic appears secure.

In Russia, Vladimir Putin’s approval rating is in the high 80s despite steep inflation and cuts to social spending. That is in contrast to Boris Yeltsin’s last year in office, also during an epic oil-price slump, when his rating fell as low as the single digits. Even the weakened ruble, which has pushed to fresh lows against the dollar in the new year, hasn’t fomented unrest.

In Venezuela, President Nicolás Maduro faced economic chaos and opposition challenges even before oil prices peaked.

Seemingly insulated Saudi Arabia actually may be less secure. Its budget deficit hit about 15% of gross domestic product last year and the government recently has taken unprecedented steps such as fuel and water subsidy cuts to ease fiscal pressure, not to mention disclosing plans to sell part of national oil champion Saudi Aramco. The coming months will show how the so-called social bargain, in which there is no income tax and the vast majority of Saudis work in some capacity for the government, holds up in an age of austerity.

With both Shiite minority dissidents and Islamic State challenging the monarchy while its military is involved a war in neighboring Yemen, it is an awkward time to put public sentiment to the test.

As oil exporters lick their wounds in the bruising fight for market share, dollars and cents don’t tell the whole story. Signs of internal unrest may become a key barometer for how long they will be willing, and able, to wage the price war, and just how much further oil may drop. 

By: Spencer Jakab.

Review: Emerging Market Formulations & Research Unit, Flagship Records.
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