In its recent outlook, OPEC (Organization of the Petroleum Exporting Countries) stated that crude may not reach $95 by 2040. The fiscal break-even cost for different OPEC countries is more than $70 per barrel. Saudi Arabia’s fiscal break-even cost is ~$105. The US (SPY) is an important market for Saudi Arabia. In contrast, Iran’s fiscal break-even cost is around $130 per barrel.
All of the statistics above indicate a high fiscal deficit for OPEC members in the coming years. A high fiscal deficit indicates a cut in government spending. This can spread social unrest among different OPEC nations. Experts expect a high fiscal deficit related to the leadership crisis whether in individual OPEC nations or in OPEC itself.
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Since crude oil will likely stay at the current levels for the next few years, OPEC countries will face serious leadership challenges in the future. Lower crude oil prices are a direct loss for crude oil exporters. Oil exports account for a significant portion of OPEC members’ GDP (gross domestic product). Countries like Libya and Algeria faced a high fiscal deficit in 2015. Libya’s fiscal break-even cost is above $180 per barrel. Higher volumes are the only way to drive the revenue at lower energy prices. This can lead to lower crude oil prices. All of this means a more divided OPEC. It could signal plenty of oil in the future.
The above chart shows the fiscal break-even costs for prominent OPEC nations and other top producers.
Russia (RSX) is an important player in crude oil. Its export fiscal break-even cost is around $105. Russia in a non-OPEC member country. Gazprom PAO (OGZPY) operates with a production mix of 10% in crude oil. Lukoil (LUKOY) operates with an 85% production mix in crude oil.
Gazprom PAO, Lukoil, and Tatneft (OAOFY) represent the large-cap Russian ADRs (American depositary receipts) in the oil and gas sector. In the next part, we’ll discuss how the strong dollar impacts crude oil prices.