This is the 'reckoning point' for a bunch of oil producers

Oil prices have rebounded over the past few months.

Both West Texas Intermediate and Brent crude are currently around $49 per barrel, well above their lows below $30 per barrel earlier this year.

However, that doesn’t mean that everything is going well for all of the oil producers. Quite the opposite, in fact.

The political, economic, and security crises of several OPEC members, which have been exacerbated by nearly two years of lower oil prices, are finally reaching a critical moment.

“This is the reckoning point. When you look at OPEC, so many of the members have never looked so fragile,” Helima Croft, head of commodity strategy at RBC Capital Markets, told Business Insider in an interview on Tuesday. “They’re all going off the cliff together.”

Notably, there are two camps within OPEC: one has sort of weathered the stress of lower oil prices so far, while the other has been totally crushed.

The former group includes the relatively better-off Gulf Cooperation Council (GCC) members — Saudi Arabia, Qatar, Kuwait, and the UAE. As for the latter, it includes a group nicknamed the “fragile five” by RBC Capital Markets — Venezuela, Nigeria, Libya, Iraq, and Algeria — and they all have plunged deeper into chaos in the last year.

Here’s a short refresher on what’s happening with the states in the second group:

  • Venezuela is barreling towards a political and economic meltdown as political challenges and mounting debt continue to strain an already tense situation. The status of its oil production is the next big wild card for commodity markets.
  • Nigeria is heading into a “full-blown economic crisis” in light of lower oil and the government’s controversial foreign-exchange and price-control policies. Plus, a new militant group called the Niger Delta Avengers has shut down a huge chunk of production, and has dethroned the country as Africa’s largest oil producer.
  • Libya‘s thorny political and security situation has been complicated further by a lack of a strong government and the proliferation of armed groups, including ISIS. “People have this benign view of Libya and think it’s going back to a million barrels. [But] ISIS is sitting right in Sirte … who’s going to open the facilities there? Not the best place to start,” Croft said to BI.
  • Iraq‘s political crisis grows worse by the day. And now, security forces have been set up near southern oil facilities after a spike in protests over the lack of economic opportunities created by the energy sector.
  • Algeria, too, continues to struggle with political instability and serious security challenges. Plus, there are worries about a succession battle as President Abdelaziz Bouteflika deals with poor health.

Plus, on top of that, Angola is teetering on the edge of joining this unenviable group.

The interests of the cartel’s members have never seemed so far apart. Whereas the fragile five could certainly benefit from coordinated OPEC action, other members like the Saudis and the Iranians have no incentive to cut.

And now the upcoming June OPEC meeting in Vienna is shaping up to be a total non-event, which is not exactly a great sign for the fragile five going forward.

“I’m starting to question why anyone bothers to show up [to the OPEC meetings]. I’m not sure what’s in it for half of the cartel,” Croft said. “The idea that OPEC is going to come to your rescue, that they’re going to provide you a lifeline to avoid a crisis — I think those days are over.”

“The callous indifference of certain countries to the fate of of other members is stunning,” she added.

Notably, some investors tend to write off the on-going crises in the fragile five as “noise.”

However, things have been deteriorating since 2015 due to the poisonous cocktail of deeply-rooted structural problems and lower oil prices. And they could get even worse going further.

As Croft argued when speaking to BI:

“There’s a view in the market that, eventually, people get their act together. They all get incentivized to work together. [However], in many of these countries, things can always get worse. Bet on dysfunction. Bet on the bad outcome. When you have very weak structures, when you have nefarious actors, when you have deep political, social, and regional divisions, you should at least consider the worst possible outcome seriously. Don’t just think, ‘It all gets better! It’s all just noise!’

… These are structural problems in these producing states. This not ‘noise.’ This is not something that you can take your magic wand and make this thing go away.”

In sum, this is a critical moment for OPEC worst-off producers — and it’s unclear how things play out going forward.

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