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The Countries Hit Hardest By The Oil Price War

Nick Cunningham

The recent plunge in oil prices has put the financially ravaged U.S. shale industry in the spotlight over the past week, but the market downturn will blow a hole in the budgets of oil-producing countries as well.

At the company level, the pressure is rapidly mounting. Spending cuts have been immediate, but the credit quality of the oil and gas industry is straining. S&P said that it was reviewing credit ratings of the energy sector. “We are not going to be as patient as we were before,” said Michael Grande, a senior director at S&P Global, according to the FT, referring to the last downturn five years ago. S&P suggested that Devon Energy and Hess Corp., for example, could lose investment-grade status.

Meanwhile, roughly $110 billion in energy debt sold by U.S. companies has slipped into distressed territory. Junk energy debt could receive “multiple notch downgrades,” Thomas Watters, a managing director at S&P Global, told investors on a call, according to the FT.

At the same time, much of the world’s oil production is extracted by national oil companies. Their governments depend on oil revenues for their budgets.

Credit ratings agency Fitch said that a wave of sovereign downgrades could be forthcoming if oil prices remain at low levels. “Countries that are in a somewhat vulnerable external position and have a fixed exchange rate are of course particularly vulnerable,” Jan Friederich, a Middle East and Africa sovereign analyst with Fitch, told Reuters.

Russia has stated that it can withstand oil prices in the range of $25 to $30 per barrel for six to ten years. Russia’s Energy Minister Alexander Novak went further, declaring that Russian oil companies will remain competitive “at any forecast price level.” Russia has a few things working in its favor, such as a flexible exchange rate that allows oil firms to earn dollars but pay expenses in rubles. A declining oil price tends to be offset somewhat by a weaker local currency.

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In that context, Saudi Arabia is less flexible, needing to shell out foreign exchange to prop up its fixed exchange rate. The Saudi government can do that for a long time, but not forever. In addition, while Saudi Arabia has some of the lowest oil production costs on the planet, the budget requires oil prices in the mid-$80s per barrel to break even. Riyadh apparently believes it can force out high-cost producers before the pressure on its own finances becomes too great to bear.

But smaller oil-producing countries with fixed exchange rates could be in more trouble. Nigeria, for instance, does not have the deep pockets of Saudi Arabia. It too has to defend a fixed exchange rate, and during the last market downturn (2014-2016), the government imposed currency controls to stop the outflow of dollars. Today, only a week after the OPEC+ collapse, there are already signs of a shortage of dollars in Nigeria.

There are other countries at risk, including Iraq, Oman, Angola, Suriname and Gabon, according to Fitch. None of the Gulf Arab states can balance their budgets with oil at $40 per barrel or lower, according to S&P and Reuters.

Mexico’s Pemex may have shielded itself somewhat from a rather large hedging program, but the state-owned oil firm has been at the precipice of having its credit rating downgraded further for quite some time. Last year, Fitch put Pemex into junk territory, but additional downgrades would trigger even more capital flight. Mexico also has the unfortunate reality of having its economy depend on the U.S., which is about to go into a deep freeze of mass coronavirus quarantines.

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Canada has a more diversified economy, but is still staring down recession because of the oil price plunge. Alberta’s provincial government may turn back to mandatory production cuts to ensure a “survival price” for its industry, as Premier Jason Kenny put it. “Unfortunately, we do expect to see a number of layoff announcements in the next two to three weeks,” Alberta Premier Jason Kenney said on Wednesday. Canadian Prime Minister, under quarantine because his wife tested positive for the coronavirus, said on Friday that he will soon introduce an economic stimulus package.

And, of course, the U.S. itself is also a major oil producer, even as oil makes up a much smaller share of the economy relative to others. A recession for the U.S. economy seems highly plausible.

Ultimately, the longer the oil bust lingers, the more danger oil-producing countries will find themselves in.

Investors have sold off $41.7 billion in emerging market stocks and bonds since late January when the coronavirus started to grow worse. The oil sell-off will compound this capital flight. “It is a very large number,” Robin Brooks, chief economist at the Institute of International Finance told the FT. “This means another big tightening in financial conditions for emerging markets, because that’s what outflows are, a sudden stop.”

By Nick Cunningham of Oilprice.com

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