Will OPEC believe Iraq

Will OPEC believe Iraq

Today, OPEC ministers agreed to extend the current deal for another month. According to Iranian Oil Minister Bijan Zanganeh, the main problem was compliance by some members, such as Iraq, with quotas for reducing production. According to him, the countries that violated the quota promised to compensate production in the coming months. Iraq has failed to live up to its agreement under the cartel’s production cut deal. Does this give OPEC cover for meeting delays and overall noncompliance, or is it a sincere effort to get it onboard, Oil Price asks in the article Did Iraq Just Doom The OPEC Deal?

Whether Iraq can be brought in line and fully comply with its share of the OPEC deal is certainly doubtful. Yet interestingly enough, OPEC and Russia have staked the extension of the dealy past June, when the current level of cuts expire and cuts begin to ease, entirely on whether all laggard members bring production down to agreed-upon levels.  Either OPEC and Russia are certain they can get Iraq to bring its production down to its quota, or they are content to have the cartel’s production above normal. Russia and Saudi Arabia both agreed that the current level of production cuts should be extended at least one more month. The caveat? That all other countries implement their established quotas in full. 

That’s a pretty big ask, and if history repeats itself, it’s impossible. What this means for oil prices is that there would be no extension, inventories won’t draw down as quickly, and oil prices will remain depressed along with demand for crude--which although it is picking back up thanks to lockdowns being lifted, is still about 20 million barrel per day under what it was before the pandemic.  Iraq isn’t the only laggard, to be fair. Nigeria, Angola, and Kazakhstan are also not keeping up their end of the bargain. The cartel went to work trying to get the three, and Iraq, to recommit to the cuts, and with the exception of Iraq, all three gave the requisite assurances. Of course, that doesn’t mean they will necessarily do so, but it’s at least a start. 

OPEC’s compliance for May is thought to be about 89%. This isn’t terrible considering the volume of how much is being cut. Still, compliant Saudi Arabia is declaring its unwillingness to continue its share of the cuts for another month unless the laggards get their act together. Laggards that include Iraq, whose compliance reached only about 42% in May.

OPEC won’t even have the meeting this week unless Iraq agrees to improve its compliance. Is it all just a ploy to manage market expectations in the run up to the meeting to ensure that whatever agreement is hatched is looked upon favorably, therefore maximizing the price impact? Is it a strategy to get out of extending the deal, perhaps as discussed with U.S. President Donald Trump? Is it designed to put maximum pressure on Iraq to comply?  Chances are, we’ll never know. But one thing is for certain: Iraq will not comply with the deal--period.  In fact, it said as much. Iraq said it would fully implement cuts by the end of July-in their promise-to-fulfill-later kind of way that they have done in the past. 

Iraq the laggard

For the most part, when it comes to chronic noncompliance, we are talking about the usual suspects of Iraq and Nigeria. But Iraq is so much bigger. Both countries have unique challenges when it comes to sticking to any production cut deal that OPEC or OPEC+ could ever hatch. For Iraq, it is their reliance on international oil companies, most of which operate in the semi-autonomous Kurdistan region. So on one hand, Iraq doesn’t want to bite the hand that feeds it--big foreign oil companies--and on the other, Iraq has a tough time trying to regulate what goes on in the Kurdistan region. This is not even to mention the rocky political climate in Iraq.

For Nigeria, it’s the fact that it has a strong reliance on its oil revenues. Most OPEC nations rely on oil revenue for a substantial part of the revenue. But for Nigeria, shutting down oil production and forgoing the revenue associated with that oil production is tough.  Yet Nigeria has agreed, although its May compliance was still not up to snuff.

OPEC’s other problem

Is OPEC really worried about the extra barrels Iraq is pumping? After all, Saudi Arabia has overachieved its own quota for well over a year while the laggards basked in their overproduction. Most signs point to legitimate worry. Saudi Arabia has declined to publish its July OSP for July until after the meeting. The Kingdom is also raising its customs duties on hundreds of products to generate more non-oil revenue. In a similar vein, it’s tripling its VAT and suspending its cost of living allowances. These are worrisome signs.

What’s most concerning in the market, however, is the notion that the OPEC deal could fall apart entirely. The previous deal catastrophe is all too fresh in our minds after Russia and Saudi Arabia--the two heavyweights in the deal--failed to reach an agreement over the cuts. The deal failure triggered a price war between the two, plunging the world into a glut of oil and sending prices spiraling as demand fell in the wake of the pandemic. 

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