Syed Rashid Husain Markets are sinking. Global benchmarks, WTI and Brent, are hovering around their 6-1/2-year lows - heading for the eighth consecutive week of fall - the longest losing streak since the crash of mid-80s. Then too oil prices had slumped to $10 from around $30, over a five-month period, as OPEC raised output to regain market share following a surge in non-OPEC output. Supply continues to be strong. Despite falling prices, US inventory levels are rising, now at “near levels not seen for this time of the year in at least the last 80 years.” Contrary to expectations of a decline, the amount of oil held in US commercial stockpiles rose last week to 456.2 million barrels last week - up from 453.6 million the preceding week. The growing supplies are impacting the market balance “The stunning fact is that Saudi Arabia, Iraq and the US together added 2 million bpd to world oil supply since the price collapsed,” Daniel Yergin of IHS was quoted as saying. “And this is even before Iran came back to the market.” And in the meantime, demand too is on a slippery slope. Chinese industrial output shrank at its fastest pace in almost 6-1/2 years in August as domestic and export demand dwindled, generating the specter of lower crude consumption by the world's second-largest crude consumer. Yet, the floor is yet not there, most insist. Prices are to go down further, as with the summer driving season coming to a close, demand traditionally slows down and refineries around the globe go into their regular maintenance. “Demand for crude will soon fall nationally from current levels in September with the onset of seasonal refinery maintenance, leading to further builds (in stockpiles),” BNP Paribas said in a report. A consensus seems emerging that prices might have to fall further. There's a “conceivable reality,” the US oil prices may plummet to a new 11-year low of $33 a barrel or lower this year, a Citigroup report released last week said. This new “How low can oil go?” report contends that capital markets are “getting nervy” and one of the only ways to stop this downward trend is for North American shale companies to lose more access to capital during the next phase of borrowing negotiations in October, called redetermination. In February 2009, closing US oil prices last bottomed out at $33.98 a barrel during the Great Recession. As per a CNBC survey, majority of traders and analysts now see oil falling to the same range - $30 to $40 in the near term. Cumberland Advisors' David Kotok thinks the worst may be yet to come. “We could go back to $15 or $20, this is a downward slope, we don't know a bottom,” Kotok said in an interview with Bloomberg. And this is playing havoc with most, if not all, OPEC producers. As oil prices slump, the risk of worsening political turmoil is rising within ‘most vulnerable' in OPEC. The Fragile Five' listed by RBC Capital Markets Ltd included Algeria, Iraq, Libya, Nigeria and Venezuela. Venezuela “appears poised for a near-term crisis” amid protests and shortages of basic goods, RBC analysts Louney and Helima Croft underlined. Nigeria is no different. Its currency naira has weakened 7.8 percent against the dollar this year, pushing inflation outside the central bank's upper target of 9 percent, and, the recovery of Nigeria's depleted cash reserves has hit a plateau. Iraq, facing instability from the ongoing fight with ISIS, has also seen its problems compounded by the fall in oil prices, causing its budget to shrink significantly. According to Fitch Ratings, Iraq may post a fiscal deficit in excess of 10 percent this year, and all the savings accrued during the years of high oil prices have been depleted. The government is now tapping the bond markets for the first time in years, looking to issue $6 billion in new debt. Libya's risks of further political chaos are among the highest within OPEC, matched only by Iraq, says RBC. Threats have also intensified in Algeria as it faces “a looming leadership transition.” The economies of both North African nations tipped into a current account deficits last year after more than a decade of surpluses. Others too are faced with crucial issues. The world's ninth-largest oil producer, Mexico hedged oil exports for 2016 at an average price of $49 a barrel, down 36% from the hedge for this year - $76.40 a barrel. The Mexican crude-oil benchmark is currently trading near $38, some 60% lower than a year ago. Norway's economic growth too is slowing as plunging crude prices sap investments and drive up unemployment in western Europe's biggest petroleum producer. OPEC kingpin Saudi Arabia too is faced with hard choices. Saudi Arabia's real GDP growth is expected to slow to 2.8% this year, and further to 2.4% in 2016 as government spending begins to adjust to the lower oil income, the IMF said. The fund forecasts a fiscal deficit of 19.5% of GDP in the kingdom this year. Suggesting ways to plug the gap, IMF underlined “sizable multiyear fiscal adjustment” by taking measures such as revising energy subsidies, controlling public sector wages, and expanding revenues not stemming from oil, a value-added tax, or VAT and a land tax. How could OPEC react to this evolving crisis? Although, the next OPEC meeting is a still a few months away, yet, speculation is ripe about the issues it may have to grapple with during its next moot. Dalan McEndree writing for Oilprice.com hints at strong disagreements with the producers' group against its current policy.
