Venezuela, Nigeria, Iraq, Iran face strong uncertainty near-term; IPO diluting Saudi loyalty to OPEC

Just when OPEC seems to have finally found success in chipping away at a global oil glut with its production cuts helping to rebalance the global oil market and lift prices, the group’s near-term future is anything but certain.

Several member countries will likely face challenges in the coming months, even if oil prices hold for a while at current levels.

Venezuela: default before yearend? Venezuela’s economy gasping for air -PDVSA’s $3.5 billion debt due in 30-60 days

Venezuela is currently experiencing major financial difficulties. Totally dependent on oil exports for revenue, the oil price downturn hit the South American producer particularly hard. Venezuela is presently experiencing the worst inflation in the world, and there seems to be no end in sight.

This situation there could come to a head in October and November.

PDVSA, Venezuela’s national oil company, has $3.5 billion in debt coming due in the next two months, with a very high probability of default. Continually falling production and currency reserves that have dwindled to less than $10 billion make these payments a significant uphill climb for the company. The math simply does not work on PDVSA staying solvent without help from China and Russia, RBC head of commodity strategy Helima Croft told CNBC. “We think this default is a clear and present danger,” she said.

According to the most recent OPEC Monthly Oil Market Report, Venezuela produced 1,918 MBOPD in August, and speculation abounds regarding how precisely oil production would be affected by a default. It is almost certain, though, that the disorder would decrease output.

Nigeria: disruptions may resume

Nigeria may also be facing future troubles. The country has been exempt from the current OPEC cut, as it has been dealing with internal unrest for the past year. Attacks by militant groups forced about 300 MBOPD of oil production offline in 2016. The country has had recent success calming the situation, and production is close to historical levels of 1.8 MMBOPD.

However, analysts are questioning if this situation can hold. “Militant groups are running out of patience, the government is unable to deliver on its promises, the president is a ‘lame duck’, and the umbrella group negotiating on behalf of the militants shows signs of disintegration,” Verisk Maplecroft senior analyst Malte Liewerscheidt told CNBC.

If the Niger Delta flares up again, the 300 MBOPD that the government worked to restore could be shut off again. Tensions could grow as Nigeria’s 2019 presidential elections loom.

Iraq: Kurdish independence vote puts a large portion of Iraq’s production into question

The recent vote for independence in the Kurdistan region of Iraq may also imperil OPEC production.

Kurdish forces currently control the oil-rich province of Kirkuk in northern Iraq, and would want to retain this control if the region becomes independent. As it is a landlocked country, however, Kurdistan would have trouble getting the region’s oil to markets.

Turkey recently announced that it may “close the valves” on oil exports from Kurdistan, cutting off a major portion of total Iraqi production. Iraq and Iran have also opposed the vote, meaning Kurdish oil would not be able to flow through those countries.

According to Bloomberg, operations around Kirkuk are capable of producing more than 1 MMBOPD, and have over 9 billion barrels of reserves. Cutting this field off from markets would be a major disruption in global supply, and oil prices may rise further if tensions rise.

Overall, Iraq is currently producing 4,448 MBOPD. If Kurdistan successfully wins control of one of the country’s most important fields, and other countries refuse to allow the Kurds to transport the oil, it would imperil the production of the second largest OPEC country.

Iran: sanctions could come back quickly

Future developments in Iran are less likely to directly affect global oil supply, but could be just as important. U.S. officials have criticized the 2015 U.S.-Iran nuclear deal that lifted Iranian sanctions. President Trump has expressed support for resuming sanctions, a move that would discourage investment into the country’s oil industry at a time when new deals are just beginning to be struck.

Iran has added nearly 1 MMBOPD of production since 2015, rising from 2,836 MBOPD in 2015 to 3,828 MBOPD in August 2017. If sanctions resume and production falls to pre-sanctions levels there would be a significant effect on the amount of oil entering the world marketplace.

Saudi Arabia: can of worms – kingdom needs to ensure a successful IPO at highest possible price

Further complicating the future of OPEC is Saudi Arabia’s pending Aramco IPO. Saudi Arabia desires a higher oil price for its national oil company’s first listing as a publicly traded company, as this would give the kingdom itself much needed additional funds. Saudi began pushing for a group production cut after it had decided on the IPO, and it did so with a never-before-seen bargaining chip, according to Reuters: if there was no deal, Saudi Arabia would leave OPEC entirely.

While this threat was not enacted, the very fact it was an option speaks volumes regarding how the Kingdom is changing its views on OPEC.

According to Reuters, further problems will arise after Aramco is publicly traded. Anti-trust laws forbid price fixing, which Aramco could be accused of if it continued to follow Saudi Arabia’s OPEC policy of adjusting output to manage prices.

Influence May Crumble: Storm Clouds Billowing Over OPEC Members

Source: EnerCom Analytics

Legal Notice