GOST razgledi.net

Helios Padilla Mayer
senior commodity analyst, Fortis Bank, Brussels
helios.padillamayer@fortis.com

The recent decline in oil prices (see Figure 1) has raised concerns about the impact that lower oil revenues will have on oil exporting countries. Such a drop will impact fiscal budgets depending on their spending patters and different sizes of their economies. OPEC decision to cut production has been divergence between their members. However, we expect OPEC to act aggressively today (October 24) in order to defend oil prices. Global markets continue to decline on recession concerns: European Futures Dow Jones Euro Stoxx 50 Index, a benchmark for the euro area, is down by 7.2%, American FTSE 100 declined by 5.9% and the Japanese Nikkei 225 by 9.6%. At these conditions, OPEC has to cut production at least by 1.5-2 million barrels otherwise markets will not react and price in the supply reduction.

Price requirements for seven key oil producing countries show a different path of two set of price requirements. The first decomposition of price is based on the price required to balance next year’s budget without spending reductions. Breakeven estimates for the case of Venezuela are at $100 USD/barrel, Iran at $90 USD/barrel, Nigeria at $80 USD/barrel, Algeria at $60 USD/barrel, Russia (non OPEC) at $50 USD/barrel and Saudi Arabia at $50 USD/barrel.

Alternative estimations are based on the price that countries would need if they were willing to dip into 20% of their cumulative budget surplus to balance their budget. Venezuela (cumulative budget deficit) budget requirements remain at $100 USD/barrel, Iran at $80 USD/barrel, Nigeria at $65 USD/barrel, Algeria at $35 USD/barrel, Kuwait at $20 USD/barrel, Russia at $20 USD/barrel and Saudi Arabia at $25 USD/barrel can balance their budget. While these price figures are not sustainable in the short term without spending cuts, they show how low the price may drop in order to be absorbed by such oil producing countries.

Countries with bigger breakeven prices, Venezuela, Iran and Nigeria, will have greater pressure to adjust their budgets. Possible actions involve dipping into foreign exchange reserves as could be the case of Venezuela which holds as for October $39 billion, Iran with $81 billion and Nigeria with $62 billion in official foreign exchange reserves. The second alternative is to issue new debt burden once the credit crunch eases. In both cases Nigeria and Venezuela lowered significantly their debt burden over the past years and are in better positions to acquire new debt. Venezuela recently holds a $5.6 billion debt plan.

Moreover, the least sensitive scenarios are the cut in spending, given the drastic run-up in expenditures since 2004. Venezuela and Iran have quadrupled their spending levels and over the past years Venezuela has purchased over $5 billion of Argentinean debt and provided hundred of millions of dollars to assist Bolivia and Belarus economies. It has also purchased $4.4 billion in arms from Russia and over $2.5 billion in subsidized oil deals to Petrocaribe and Cuba. More sensitive issue is cutting back domestic fuel subsidies. Iran may be forced to apply subsidy cuts and pricing reform. Nigeria faces less pressure on fuel subsidies since the retail petrol price ($2.12/gallon) is approaching market levels following a drop in price.

Recent drop in oil prices (50% drop since last peak $147 USD/barrel) could cause greater competition for resources and increase the risk of domestic instability. It could also slow down social development and infrastructure plans. In countries like Iraq and Nigeria domestic turmoil has impacted exports of crude oil and as a consequence increased risk of long-term stability. Lower oil revenues will impact the funds available from OPEC for development programs in Africa and South Asia, where foreign assistant is fundamental for their market operations. Nevertheless, we believe that OPEC members will cut supply of oil drastically. OPEC learned the lesson about the consequences of caution ad get ahead of them during the Asian financial crisis.

The Organization needs to be convincing to the market, promising compliance and additional cuts if necessary. Fighting the tape will not be easy based on recent history.

Figure 1: WTI and Brent Crude Oil Spot Prices in $/barrel, 1 January -23 October 2008, daily data

^{Source: Bloomberg}

Objavljeno pod gost razgledi.net, gospodarstvo | | |