Oil prices dropped more than 1 percent on Tuesday as waning expectations of an OPEC deal weighed on the market.
Iraq insisted on Sunday that it be allowed to be exempt from production cuts should OPEC reach a deal in a month’s time in Vienna. Iraqi officials said that it needs every possible resource to fight against the Islamic State, and the costly battle is a justification for allowing Iraq to be excluded from the coordinated production cuts.
"We are fighting a vicious war against IS," Iraq’s oil minister Jabar al-Luaibi told reporters. The head of Iraq’s state-owned oil marketing company, SOMO, went further. "We should be producing 9 million if it wasn't for the wars,” Falah al-Amiri said, according to Reuters. "Some countries took our market share.” Fellow OPEC members like Saudi Arabia, and especially Iran, have ratcheted up output over this past year. Iran, for one, will be exempt from the November cuts, a fact that is not lost on Iraqi officials.
Iraq makes a strong argument for its special treatment, but every exemption granted by OPEC to member countries pokes holes in the efficacy of a final deal. With Iran, Libya and Nigeria already not included in the planned cuts, the significance of any result is already in doubt. But if Iraq, too, is excluded, then any cut of substance will really need to come from Saudi Arabia.
OPEC members agreed to a collective cut of a relatively small 200,000 to 700,000 barrels per day. Much of that could be achieved through the usual seasonal adjustments in Saudi Arabia – as summer ends and cooler temperatures arrive, Saudi demand falls and as a result production is throttled back. Saudi Arabia might have cut several hundred thousand barrels per day because of the end of summer demand, and so it gains a lot and loses little by calling it a “production cut” as part of an OPEC deal, than to quietly lower output as it typically might at this time of year anyway.
Nevertheless, cuts from other members are also necessary even as output is actually on the rise. Nigeria and Libya are restoring production at a faster clip than some thought a few months ago. Nigeria’s oil minister said that his country’s output has climbed to 1.9 million barrels per day (mb/d), up from a low of 1.3 mb/d several months ago following a string of attacks from the Niger Delta Avengers. Nigeria is now not far off from the 2.2 mb/d it typically produces. Meanwhile, Libya has ramped up output to 580,000 to 600,000 barrels per day, up from the less than 300,000 bpd it had been producing for much of the past three years. If those numbers are correct, the two countries have together added roughly 600,000 barrels per day since September, according to OPEC’s secondary sources data. In other words, Nigeria and Libya just added about as much oil to the market in the past month as OPEC says it will cut as part of its November deal.
That presents a dilemma for OPEC, or more specifically for Saudi Arabia. Riyadh was the one that wanted the deal more than anyone (aside from, maybe, Venezuela), so the burden of making deeper cuts in order to create the desired price stability will almost certainly fall on Saudi Arabia. Bloomberg calculates that Saudi Arabia might need to cut as much as 1 mb/d to give the agreement some credibility, a figure that assumes Iraq is granted an exemption and the excluded countries continue to increase output. If Saudi Arabia does make those cuts, it would take output to a two-year low, down to levels not seen since the market began to nosedive back in 2014.
That could be asking too much. The WSJ reported in early October that Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman authorized his negotiators to reach a deal on production cuts, but only involving amounts that Saudi Arabia had planned on cutting anyway as part of its seasonal changes.
If that is the case, then it could be difficult to reach a deal in Vienna. Should OPEC grant Iraq an exclusion at the risk of leaving yet another major producer outside the framework? If Iraq is excluded, will Saudi Arabia make the deeper cuts necessary to make the deal work? If not, then the deal will need to be watered down tremendously, at which point, OPEC loses credibility once again. But if Iraq is not excluded, then it is possible that Iraqi officials could work to scuttle a deal altogether.
It has become something of a joke among oil analysts that OPEC repeatedly issues statements regarding “optimism for a deal,” paying lip service to cooperation, while ultimately each member refuses to make sacrifices.
By Nick Cunningham of Oilprice.com
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