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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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What Iraqi’s Support For An OPEC Freeze Means For Oil

Iraq surprised the oil market this week by insisting that it would support an output freeze at the upcoming OPEC meeting in Algeria. The comments upend expectations about the outcome of the meeting, raising the chances of an historic deal.

“We support freezing oil production by OPEC due to the sharp decline of oil prices,” Iraq’s Prime Minister Haider al-Abadi said at a news conference on August 30.

Previous comments from top Iraqi officials suggested that Iraq, OPEC’s second largest oil producer, would not support any agreement to limit output. Opposition from Iraq, along with the questionable commitment from Saudi Arabia and the outright opposition from Iran, made any positive result hard to fathom.

But Iran’s opposition has softened in recent weeks as well. For one, Iran agreed to attend the Algeria summit, slated for September 26-28. Also, Iran has boosted its oil production dramatically this year, bringing back roughly 700,000 barrels per day of lost output. At 3.5 million barrels per day, that puts Iran just 80,000 barrels per day shy of its pre-sanctions total, a threshold that Iran said it must hit before it even considers coordinating production levels with OPEC. Because Iran is nearing its pre-sanctions output levels, and because the next tier of production increases will be much harder to achieve – requiring the help of international companies and much longer time horizons – Iran could be open to a production freeze in a way that it wasn’t in April at the last OPEC meeting in Doha. Related: Oil Floods The Streets Of Iraqi Town After ISIS Opens Tap

Iraq has also scaled up oil production in recent months. Iraq produced an impressive 4.6-4.7 million barrels per day in July, up more than 1 million barrels per day from its 2015 average. But Iraq, like Iran, could struggle to push forward with further production gains. Because of the fiscal strain hitting Baghdad from low oil prices and its war with the Islamic State, Iraq has scarce resources in which to incentivize oil companies to expand drilling operations.

The difficulty of ratcheting up production from today’s levels could make both Iraq and Iran amenable to a production freeze deal in Algeria, since they will have little to lose. While the freeze deal has repeatedly been noted by oil market analysts as not all that significant in terms of its effect on the fundamentals of supply, it would have a substantial effect on market psychology, probably sparking a price rally even if in reality not much production will be moved offline.

There is still a lot of hurdles to be overcome before the parties involved can reach an agreement, not the least of which is their mutual distrust and suspicion of each other. But the comments from Iraq’s Prime Minister likely increase the odds of a positive result in Algeria.

By Charles Kennedy of Oilprice.com

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