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OPEC Poses Petroleum Price Problems

By David Smith - Updated Apr 6, 2017 at 10:30PM

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With half of the cartel's countries on shaky ground, is crude headed for the stratosphere?

Libya, currently the most chaotic member of the OPEC cartel, may have filled recent headlines, but it's easy to conclude that half of OPEC's dozen countries are also dodging some form of disarray.

As a result, and despite the stabilizing efforts of some of its stronger members, the cartel's total production slid in March by more than 400,000 barrels a day, to an average of 29.34 million barrels. Unless tranquility suddenly sweeps across the Middle East and North Africa (MENA), OPEC's output could easily head lower, which would almost certainly send prices even higher.

Who's sneaking out of Libya?
Obviously, the lion's share of the production decline owes to Libya, where output plummeted to 343,000 barrels a day, from an average of 1.4 million barrels in February. Furthermore, with a civil war raging between forces loyal to the country's despotic leader, Col. Moammar Gadhafi, and the rebels who oppose him, conditions are anything but optimal for the companies that have established operations in the country.

That group includes the likes of Italy's Eni (NYSE: E) and Norway's Statoil (NYSE: STO), along with U.S.-based ConocoPhillips (NYSE: COP) and Occidental (NYSE: OXY), among others. Gaddafi and his henchmen could potentially seize and nationalize the operations of western companies with interests in Libya.

Indeed, the chairman of the country's National Oil Corporation recently warned these countries that removing their employees from the country could prompt Libya to shift these western operators' concessions to companies from China, India, and Brazil. None of those countries supported a United Nations resolution to freeze the assets of the state-run oil company.

There is also widespread concern about the composition of the rebel groups that are battling Gadhafi's forces, along with the possible spread of Libya's war to neighboring countries, and the war's long-term effects on the energy markets. Algeria, which sits immediately to Libya's west and is an OPEC partner, has expressed concern about the heightened numbers of apparent Al-Qaeda types now in Libya.

On Wednesday, the New York Times reported comments from Algeria's former energy minister that, despite the uncertainty of the Arab uprisings, "important changes are in progress that are likely to impact energy markets in the long term." He said so a conference in Paris that included representatives of both oil companies and producing governments.

A dangerous vote in Nigeria
Heading south from war-torn Libya through either Niger or Chad, you land in Nigeria, where violence and disruptions of energy companies' efforts have become a fact of life. Those conditions could significantly escalate this month as national elections approach.

Nigerians will select the country's president, along with national assembly representatives and governors for each of their 36 states. But between those elections' previous one-week postponement, and the country's history of frequent attacks on oil operators -- an explosion at an Eni facility in March followed an attack on an ExxonMobil (NYSE: XOM) offshore platform in November -- anything is possible. It's therefore not surprising that Royal Dutch Shell (NYSE: RDS-B), Eni, and Total (NYSE: TOT) are selling four blocks that they own jointly in Nigeria.

In fact, the violence that erupted at political rallies in February was reminiscent of the country's elections four years ago, when attacks curtailed production by up to a million barrels a day. Given Nigeria's current output of about 2.2 million barrels a day, 40% of which goes to the U.S., a repeat of the last election performance could push crude prices even higher than their 17% hike in the first quarter.

The Bobbsey twins: Mahmoud and Hugo
You won't be surprised to learn that I place Iran among the OPEC members with the potential for uprisings and other forms of violence, including geopolitical shenanigans. With that obvious candidate out of the way, let's move on to Venezuela, where, after a dozen years in office, our friend Hugo Chavez is also preparing for an election. But this ally of Gadhafi is doing so amid an economy that is far less than sound. The country's infrastructure is deteriorating, with food frequently in short supply. Under those conditions, a recent poll lined up only 26% of those responding behind Chavez.

Venezuela's precarious economy led President Chavez last year to take out $40 billion in Chinese loans, to be repaid with oil production. By tripling its oil exports to China during the next three years, Venezuela should further reduce its exports to the U.S., which already have been lowered by 16% to 959,000 barrels per day. Amazingly, the Chinese are effectively paying just $3 to $4 a barrel -- a fantastic deal, all things considered.

Is Saudi Arabia short-counting?
An extra 500,000 barrels a day from Saudi Arabia softened OPEC's production slide in March along with 37,000 barrels a day and 90,000 barrels a day chipped in by Kuwait and the United Arab Emirates, respectively.

I'm inclined to watch the output and citizenry of Saudi Arabia -- OPEC's biggest producer. After all, geographically it snuggles up to both Yemen and Bahrain, both of which have experienced varying degrees of upheavals. At the same time, both a WikiLeaks cable and Twilight in the Desert: the Coming Oil Shock and the World Economy, a 2005 book by the late Houston energy banker Matthew Simmons, contend that Saudis may have overstated their reserves by as much as 300 billion barrels, or 40%.

While both Simmons' book and WikiLeaks' assertion have been subject to controversy, any meaningful overstatement of Saudi reserves would trim OPEC's spare capacity, with a predictable effect on worldwide crude prices. As such, given the continuing unrest in MENA and the likelihood that crude prices will probably keep rising, I feel ever more conviction that Foolish portfolios need solid energy representation.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$62.27 (1.12%) $0.69
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
$44.10 (-0.16%) $0.07
ConocoPhillips Stock Quote
$74.57 (2.42%) $1.76
Statoil ASA Stock Quote
Statoil ASA
$26.35 (3.09%) $0.79
TotalEnergies Stock Quote
$49.44 (0.63%) $0.31
Eni S.p.A. Stock Quote
Eni S.p.A.
$28.17 (1.44%) $0.40
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
$31.12 (4.29%) $1.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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