Oil: Going Down South

What is the minimum level of the oil price at which OPEC's African producers can feel comfortable? One metric is the "fiscal breakeven" which is the price at which governments can balance their budgets. Estimates vary but a broad consensus suggests that Angola and Nigeria require at least $90 and $120 per barrel respectively. War shattered Libya, which has huge rebuilding demands, needs around $270, while Algeria requires $95.

So last Friday’s OPEC meeting, where Saudi Arabia, which drives the organisation’s production stance on account of its dominance of output and spare capacity, decided against supply cuts to push prices north, promised more prolonged pain. But this has been aggravated by the subsequent fall in the crude oil price with Brent down more than 7% since Thursday to a near seven-year low of $39.91.

What's next? The consensus view still envisages a rise in the oil price towards $70 by the end of next year. But this is largely based on the untested idea that a significant chunk of North American shale oil producers will be unable to survive the low price environment and find it difficult and hazardous to re-enter should prices start rising, aided by signs of strengthening demand.

But the experts have been repeatedly over-optimistic since the mid-2014 collapse in crude prices. Moreover, any upside from the retreat of the “frackers” and rising demand could be outweighed by high and climbing levels of global oil inventories, strengthening supply from non-OPEC countries who are also jostling for market share, and the potential lifting of Iranian sanctions which would be likely to add to global supply. With the downside risks dominating, finance ministries from Cairo to Pretoria should be preparing to update their $30 playbooks.