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Algerian crisis adds one more uncertainty to oil markets
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Algeria's deepening political crisis has made its future oil production extremely uncertain. So, ignominiously, it is now the latest Opec member to have become so vulnerable that it forms part of the "Shaky Six" group of nations suffering involuntary output cuts or at risk of seeing their production fall.
This adds yet another complication for the Opec+ oil ministers as they gather in Baku, Azerbaijan on Sunday and Monday to assess the effectiveness of their latest output deal and what they need to do in the coming months to rebalance the oil market. A drop in Algerian supply would add to the cuts already being implemented, but make it more difficult for the group to forecast when they might be able to ease restrictions.
Algeria's fate was sealed by 82-year-old President Abdelaziz Bouteflika's decision in February to seek a fifth term in office in elections that were due to take place on April 18. This provoked mass street protests, which did not dissipate after he withdrew his candidacy on March 11. Instead, they continued, as the president's decision to delay the poll until after a national conference on the country's political future was taken as a disingenuous tactic to avoid real reform.
Crucially for oil markets, the demonstrations that continued on Friday included the Mediterranean ports of Arzew and Bejaia, which handle nearly 90 per cent of the country's crude and condensate exports, according to Bloomberg tanker tracking. This need not present an immediate threat to production - the country's oil and gas fields are situated far inland. But limited oil storage capacity means that any disruption to flows through export terminals from workers' strikes could quickly hit output.
More worryingly, if the protests escalate, the attention of the Algerian security services may shift to quelling political unrest and away from protecting remote oil and gas fields. That could leave those facilities vulnerable to the types of attack that rocked the country in January 2013, when Al-Qaeda terrorists overran the In Amenas gas field and killed at least 38 hostages.
Political unrest isn't conducive to inward foreign investment, but any drop in spending by foreign oil companies would take time to show up in falling output. The other Opec+ members should nevertheless be monitoring the situation with extreme care. The experiences of some of the other members of the Shaky Six - Angola, Iran, Libya, Nigeria and Venezuela - offer disturbing precedents for the future of Algeria's output.
The closest comparable may be Libya, where civil unrest has seen repeated attacks on oil infrastructure. Storage tanks have been destroyed in battles to control export terminals, limiting the ability to keep pumping when storms close the ports. Production at the country's largest oil field is now recovering. It had been halted since December, when guards and armed residents seized the facilities over financial demands. The field was then taken over last month by forces loyal to eastern militia leader Khalifa Haftar.
Should the situation in Algeria deteriorate, it could suffer some of the same types of disruption, although perhaps not on the same devastating scale. A repetition of the recent past of other group members may be less likely, but still can't be ruled out.
Nigeria has had to contend with simmering discontent in its Niger River delta region, where repeated attacks on oil pipelines have prevented output from reaching its potential. Algeria should be able to avoid similar attacks, which rely for their success in Nigeria on the network of impenetrable rivers and creeks that give thieves a degree of protection and access to the sea for their ill-gotten gains.
Production in Iran and Venezuela has been hit by US sanctions, and could fall further in the coming months as President Donald Trump increases pressure on the leaders of the two countries. In Venezuela, the restrictions have come on top of decades of mismanagement, which have seen the country's production fall below a million barrels a day from nearly 2.4 million in late 2015. There may be no immediate prospect of sanctions getting levied on Algeria, but if the current political class is seen to be keeping a new leader from taking office, that certainly can't be ruled out.
Algeria produces just over a million barrels a day of light, sweet oil, most of which is exported to refineries in Europe. From the perspective of global oil balances, any loss of Algerian oil shipments might be more easily replaced with light, sweet US cargoes than has been the case for the heavier grades lost from Venezuela and Iran. But the replacement barrels will have to travel up to ten times as far to get to European refiners. That will cause further disruption to a sector that is already having to find replacements for the Iranian crude that they lost when the US re-imposed sanctions in November.
Algeria's mounting protests give Opec+ and oil market analysts everywhere one more uncertainty to factor into their ever more complex models, making forecasts more difficult and decision making more complex. A peaceful transition in Algeria could shield the oil and gas industry from serious disruption. But the risks cannot be ignored. BLOOMBERG