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7 months ago
Bets against Iraq's OPEC cuts are premature
January 10, 2017 / 12:32 PM / 7 months ago

Bets against Iraq's OPEC cuts are premature

A worker checks the valves at Al-Sheiba oil refinery in the southern Iraq city of Basra, January 26, 2016.Essam Al-Sudani/File Photo - RTX2SAP6

LONDON (Reuters Breakingviews) - Iraq could wrong-foot traders betting against its agreed OPEC cuts. The cartel's second-largest producer has little to gain either financially or politically by reneging on a deal to pump less oil. True, record volumes of crude from its main southern terminals last month tell a slightly different story. But higher oil prices would be better for Baghdad than higher volumes.

Faith in a plan to cut global oil flows by the biggest producers is fragile, and understandably so. Oil prices have stalled since the Organization of the Petroleum Exporting Countries (OPEC) - which pumps about a third of the world’s crude - agreed on Nov. 30 to implement its first cuts in eight years. Its members hope that by abandoning a war for market share and limiting output to just over 32 million barrels per day (bpd), they can eliminate oversupply and regain control of prices without triggering a recovery in America's shale drilling. That will require a level of discipline which in the past OPEC's members have not shown.

Iraq, as the cartel's second-largest producer after Saudi Arabia, enjoyed the pumping frenzy more than most. It almost doubled its output capacity close to 5 million bpd over a decade. That made Baghdad an influential force within OPEC, but lower oil prices are not helpful for a country facing the cost of fighting insurgents. The International Monetary Fund thinks higher oil prices are required if the country is to eliminate by 2020 a budget deficit equal to 12 percent of GDP in 2015. The current price of $55 per barrel is just 7 percent higher than the 2016 average.

If that weren't good enough reason for Iraq to keep to its word, there are others. Higher loading volumes from the south will be hard to sustain for long because of bottlenecks at the country's main export and storage facilities near Basra. Besides, short-term oil volumes can be misleading. Physical cuts to production may only become apparent once seasonal domestic demand, currently at its lowest, again picks up in the summer - when the Middle East switches on its air conditioning units. Until then it's too soon to believe that Iraq will break its promise. 

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