OPEC+ unity shaken as Iraq pushed to atone for oil cheating
By Bloomberg |
June 4, 2020, 6:31 a.m. |
The grand alliance that’s helped revive global oil markets is being rattled by a long-running feud over members breaking their promises.
Just a day before a proposed gathering on Thursday, the OPEC+ coalition hurriedly backtracked from a meeting intended to green-light an extension of its deepest production cutbacks and prop up crude prices.
Saudi Arabia and Russia – the leaders of the group – have lost patience with the errant behavior of the next-biggest member, Iraq, according to people familiar with the matter. While most of the main players are delivering their agreed share of output curbs, Baghdad is once again reneging on its commitments.
At stake is the unity of the 23-nation partnership, which has helped engineer a doubling in international oil prices following the battering meted out by the coronavirus crisis. If the Iraqis, and other delinquents such as Nigeria and Kazakhstan, don’t shape up then Riyadh and Moscow are warning they will start to phase out the supply curbs that are putting a floor under the market.
“Riyadh and Moscow are not kidding about implementing some form of compliance-improvement mechanism,” said Bob McNally, founder of consultant Rapidan Energy Group and a former White House official. “Without it, they walk.”
The kingdom and the Kremlin are pushing the stragglers hard – not just demanding they implement the cuts already promised, but asking for deeper curbs in the coming months to compensate for their earlier failings.
As discussions continued on Thursday, they were making progress with Kazakhstan, Nigeria and Angola, said people familiar with the talks. A deal with Iraq still hadn’t been reached, they said.
Such penance would be difficult for Iraq to accept. It made less than half of its assigned cutbacks last month, so compensating fully would require it to slash production by a further 24 per cent to about 3.28 million barrels a day, according to Bloomberg calculations.
For a country still rebuilding its economy following decades of war, sanctions and Islamist insurgency, that’s a tall order. Resisting the temptation of selling crude during the current market rebound, which has brought prices back to about $40 a barrel, may prove impossible.
While Iraqi Finance Minister and Acting Oil Minister Ali Allawi did pledge to improve compliance with pledged cuts in an unusual Twitter post on Tuesday, he didn’t go any further. The government risks a backlash from parliamentarians and rival political parties if it accedes to foreign pressure, and foregos oil sales while contending with a federal budget gap.
The Organization of Petroleum Exporting Countries and its allies pledged in April to slash oil output by 9.7 million barrels a day, or roughly 10 per cent of global oil supplies, to offset the unprecedented collapse in demand caused by coronavirus lockdowns.
A few weeks later, Saudi Arabia and its closest allies in the Persian Gulf promised additional supply restraint of 1.2 million barrels a day in June.
Riyadh and Moscow are aligned on continuing cuts at the current level for an extra month beyond July 1, according to people familiar with the matter. But if they don’t receive assurances from Iraq and the other nations at their next meeting -- currently scheduled for June 9-10 – the group’s daily supply curbs will ease to 7.7 million barrels for the rest of the year.
“Now that they’ve agreed on an extension, they’re going to turn and bring the laggards into line,” Rapidan’s McNally said on Bloomberg television on Thursday. Talks with Iraq were going well, and there could be “a compliance mechanism, something formal that drags Iraq and also Nigeria into better compliance,” he said.
If OPEC+ stays the course, the results could be dramatic. After the massive oil surplus earlier this year, Russian Energy Minister Alexander Novak predicts it could turn into a deficit of 3 million to 5 million barrels a day next month, Interfax reported. That’s roughly in line with projections from an OPEC committee that met on Wednesday, a delegate said.
Enforcing better compliance among OPEC+ nations has been a motif since Saudi Energy Minister Prince Abdulaziz bin Salman was appointed.
In his first public outing after becoming energy minister, in Abu Dhabi last September, the prince was literally applauded for securing loud pledges of atonement from Iraq and Nigeria.
But his tenure has also been stormy, and the latest move has high stakes. In March, the prince’s attempt to force Russia to make deeper output reductions backfired spectacularly, splintering the entire alliance and igniting a destructive price war.
Two months ago, Prince Abdulaziz achievement in successfully restoring the OPEC+ coalition and forging an agreement for historic production cuts was delayed and ultimately overshadowed by a spat over Mexico’s contribution to the deal.
Iraq’s recalcitrance is as old as the OPEC+ partnership itself, which was founded in 2016 to shore up oil prices against the onslaught of American shale.
Baghdad argued that the exemption from cutbacks it had received since the conflicts of the 1990s should continue. The central government also has limited influence over about 500,000 barrels a day of production from the semi-autonomous Kurdish region.
At the critical meeting where OPEC+ was formed, then Oil Minister Jabbar al-Luaibi had to leave the conference room and call his prime minister for approval to accept the new strictures.
The latest impasse isn’t yet showing signs of resolution. Saudi Aramco, the kingdom’s oil behemoth, has delayed the release of monthly crude prices to Sunday at the earliest, according to people with knowledge of the matter. That suggests there’s no clarity just yet on how the situation will unfold.
Nonetheless, recent history suggests the burden might not be as onerous as it appears, and that Iraq’s resistance could be overcome.
Last December, Baghdad was pressed to accept additional supply reductions, even though it had barely managed to cut output earlier in the year. Iraq knew it wasn’t expected to implement the entire package, but rather consider the new target as a spur to improve its performance, analysts said at the time.
“It feels like Groundhog Day again as compliance issues complicate the effort to conclude a short rollover agreement,” said Helima Croft, head of commodity strategy at RBC Capital Markets LLC. “Nonetheless, we still think these issues will be resolved and that a short extension will be announced.”
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