Iraq backs extending oil-output cuts

Iraq on Monday backed a proposal from Saudi Arabia and Russia to extend output cuts for nine months, removing one of the last remaining obstacles to an agreement at the OPEC meeting in Vienna this week.

The Organization of Petroleum Exporting Countries' second-largest producer, which only reluctantly agreed last year to cut output, had previously favored prolonging the supply cuts by just six months. Saudi Minister of Energy and Industry Khalid Al-Falih secured the backing of his neighbor for longer curbs after talks in Baghdad with his Iraqi counterpart Jabbar Al-Luaibi. Separately, non-OPEC nations Oman and Mexico also confirmed their support for a nine-month extension.

"The trend now regarding the output deal is to extend for 9 months," Al-Falih told reporters in the Iraqi capital on Monday. "All I talked to from inside OPEC are supporting the nine months of cuts," although the final decision won't be made until the group's meeting on Thursday, he said.

OPEC and 11 nonmembers agreed last year to cut output by as much as 1.8 million barrels a day. The supply reductions were initially intended to last six months from January, but the slower-than-expected decline in surplus fuel inventories prompted the group to consider an extension. Data from the U.S. Energy Information Administration indicate that maintaining the curbs into the first quarter of 2018 would bring stockpiles back in line with the five-year average -- OPEC's stated goal.

Additional countries may join the supply cuts, but the overall agreement won't be substantially changed, Al-Falih said.

"There is an initial willingness for one or two countries from the small producers to join," he said. "Slight changes might happen, but deal in its general shape will be almost the same we agreed upon last December."

Iraq has the worst record of compliance with its pledged cuts, pumping about 80,000 more barrels of oil a day than permitted during the first quarter. If that deal gets extended to 2018, the nation will have even less incentive to comply, because capacity at key southern fields is expanding and a three-year fight against the Islamic State extremist group has left it drowning in debt.

"Leaving that productive capacity idle will come with an opportunity cost that Iraq may prove reluctant to bear," said Harry Tchilinguirian, the London-based head of commodity-markets strategy at BNP Paribas SA. He's nonetheless optimistic that global inventories will fall by year-end as members like Saudi Arabia pick up the slack for Iraq.

A risk, though, emerges if Iraqi compliance worsens to such an extent that other countries in the 13-member group start cutting corners too, exacerbating a global surplus that has already erased much of the price gain that unfolded after the deal was struck in November.

Brent crude tumbled below $50 a barrel this month as data showed U.S. shale producers were alive and kicking, confounding OPEC's efforts to control the supply glut. While oil recovered losses after Saudi Arabia and Russia threw their weight behind extending the six-month output reductions, it's still more than 5 percent off post-deal highs.

"A lot of market participants have been a bit underwhelmed by the impact of the cut," Martijn Rats, an oil analyst at Morgan Stanley, said in an interview in Dubai. He said OPEC members are most likely to respect curbs if Brent trades in the $50-$60 range, with prices on either side increasing the risk of noncompliance.

Under the November deal, OPEC envisioned cutting 1.2 million barrels a day of production, with Iraq trimming output by 210,000 barrels a day to 4.351 million a day. In the first quarter, Iraq met only 61 percent of its target, though compliance improved to 90 percent in April, according to OPEC data. It's not the only straggler. The United Arab Emirates achieved just 57 percent of its cut in the first quarter but exceeded its target in April, and many non-OPEC producers including Russia also missed their goals.

"I doubt Iraq will cut any more in the second half than it has already," said Robin Mills, the Dubai-based chief executive officer of consultant Qamar Energy. It may instead produce more as it completes maintenance at several fields, new ones start production and seasonal domestic consumption rises, he said. There are some signs this has already started.

Iraq's peers are tolerating its breaches mostly because Saudi Arabia cut 35 percent, or 171,000 barrels a day, more than it needs to, according to OPEC data. As a result, the group met 96 percent of its targeted cut in the first quarter, an exceptional result given that compliance with previous curbs never exceeded 80 percent, the International Energy Agency reported.

Information for this article was contributed by Sam Wilkin, Javier Blas and Grant Smith of Bloomberg News.

Business on 05/23/2017

Upcoming Events