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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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The Trojan Horse In Oil Markets

The U.S. sanctions on Iran are not biting yet, as global oil markets are well supplied. In the coming weeks, Iranian crude volumes should show a decline. At the same time, the success of Trump’s sanctions relies for a large part on the compliance of international buyers and the position taken by leading OPEC members. The three leading NOPEC countries have indicated that they are able and willing to open their taps to supply for possible gaps in volumes worldwide. Combined with increased U.S. production, this should dampen price increases. Stability is key for most it seems, but that may not always be the case.

Iraq, OPEC’s 2nd largest producer indicates that it wants to supply Asia’s main oil consumer China with 60 percent more crude in 2019. Alaa Al Yasiri, director general of Iraq’s Oil Marketing Company SOMO, stated that Baghdad is ready and willing to ship around 1.45 million bpd to China in 2019 - 550,000 bpd more than in 2018. In addition to its 10 current clients in China, including Chinaoil and Unipec, SOMO signed an oil trading venture with Zhenhua Oil, based in Tianjin. The new venture has set a target of 160,000 bpd, to be provided to small independent refiners and large petrochemical plants in China. Iraq’s new strategy is to tap into growing Asian demand. Part of the new Iraqi supplies could even come via the Turkish port of Ceyhan.

SOMO’s statements followed statements made by Iraq’s new oil minister Thamer Ghadhban, who stated that current oil prices are fair. Ghadhban also indicated that Iraq will supply additional volumes if the market needs them. The Iraqi official also reiterated that there is not yet a need for a change to the current OPEC-Russia market strategy. By 2022 Iraq aims to have a production capacity of around 7 million bpd, in contrast to its current 5 million bpd. A more aggressive Iraqi oil (and gas) sector will have an immense impact on global markets. However, as has been seen the last years, plans and strategies in Iraq can struggle due to political infighting. At the time of writing the country still does not have a new government in place. Related: Oil Looks Set For A Rapid Bounce

The optimism of recent weeks and the progress made by the coalition set up by Prime Minister Adel Abdul Mahdi’s government has been tempered. Iraqi Shi’a power broker Moqtada Al Sadr, the leader of the Sairoon Coalition, has imposed a veto on the candidate of the Binaa Coalition for the post of interior minister, Faleh al-Fayyad. At the same time, Al Sadr refused to give the education portfolio to the Arab Project, which is led by Khamis al-Khanjar. Due to the veto, the parliamentary vote on eight ministers in the new government is postponed. Since the Iraqi elections, religious, ethnic and power politics have delayed or outright prevented any real decision-making.

Taking this situation into account, all official government statements made at present should be taken with a grain of salt. The same counts for statements made by the Iraqi PM Adil Abdul-Mahdi that Iraq is “not part” of the recent iteration of sanctions the U.S. has imposed on Iran. The latter, when looking at the current political and security power set up within Iraq, is not true. Abdul-Mahdi’s statement that Baghdad’s views on the Iran sanctions are in line with Russia, China or Europe, are incorrect to say the least. Iraq is part of the sanctions, as a vast amount of power players, militias and companies currently deciding Iraq’s future are directly linked to Iran. As the second set of U.S. sanctions targeting Iran’s energy, financial, and shipping sectors took effect on November 5, Iraq’s links to Iranian entities and the financial system also came under scrutiny. The fact that Iraq has not received any waivers, should be seen as a reflection of this. Even though some Washington sources claimed that Iraq has been given a special waiver, no such official statements have been given by U.S. Secretary of State, Mike Pompeo. Kurdish media now claims that a waiver has been given to allow Iraq to pay for Iranian electricity imports. Related: UAE Announces Major Oil & Gas Discoveries

Baghdad’s close links to and even direct involvement with Iran has been a major source of concern for the West. When considering U.S. sanctions on Iran, the main concern at present for the U.S. is that Baghdad will assist Iran in exporting crude oil via Iraqi channels. In this way, Tehran still could access international oil markets and receive hard currency. The Iraqi PM has reiterated when asked about these issues that his government is prioritizing its national interests, while supporting its sovereignty. The latter, according to U.S. and Arab sources, means that Baghdad is still open for cooperation with Iran, as long as it does not lead to hefty fines or other measures by the U.S. Statements by Iraqi officials that Baghdad is not going to take should also be taken with a pinch of salt. Current political and military influence of Iranian militias, proxies and the IRGC in Iraq will not be mitigated by U.S. pressure. Tehran will not allow any increased influence inside of Iraq that stands contrary to Iranian policy. For Tehran, Iraq is one of the only open roads to global markets. Looking at the current Iraqi government set up, and the positions taken by Muqtada Al Sadr and others, Iran still has a friend.

For Saudi Arabia and the UAE, the position currently taken by Baghdad is not a very promising one. While NOPEC may be considering production cuts in 2019, Iraq is openly planning to increase its overall production substantially. A split in OPEC, which was already hinted at when Iran called for an end to the JMCC, could occur very soon. Iran’s hold on Baghdad is still underestimated. If Baghdad and Tehran, supported by other hardliners, are willing to confront the Saudi-block in OPEC in December, a bush-fire could begin. At present, discontent is hidden under the surface, waiting for some additional oxygen to heat up global oil markets.

By Cyril Widdershoven for Oilprice.com

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  • Sean Yun on November 07 2018 said:
    US must finish the pipeline construction soonest possible, because esp in Asia, countries like S.Korea, Japan, China, Taiwan, Vietnam, and etc want to more and more shale crude oil and gas from the States due to its good quality compared to Middle East oil and gas.

    Also, the Asian currencies will be going stronger and stronger than US$ in coming years at least for the next 3-5years due to its economic booming starts in line with US economy. The oil demand will be at last recovering and surpassing its supplying glut since 2008yr.

    The bottom line is that US must install its pipeline and finish its port storage facilities, means exporting -infrastructure esp for Asia ASAP, make it much earlier than 2nd half of 2019!

    It will make not only those regional economy boosting, but also it will rapidly help reduce US trading deficits in trading with Asia.

    Indeed, Asian refineries want more and more light and medium grades of crude oils from the States. US government and local government must solve the bottleneck problem through building infrastructure as early as possible!
  • Mamdouh G Salameh on November 08 2018 said:
    Iran’s influence in Iraq shouldn’t be underestimated. While America won the military battles during the US invasion of Iraq in 2003, the real winners of the war were China (in terms of its huge investments In Iraq’s oil industry) and Iran (in terms of its political influence over Iraq).

    When it comes to US sanctions on Iran, Iraq finds itself between a rock and a hard place. Having suffered the most intrusive US sanctions prior to the US invasion, Iraq feels a lot of sympathy with Iran enhanced by Iran’s influence over Iraq’s affairs. But Iraq has enough internal political struggle and turmoil currently so as not to attract new sanctions from the United States.

    Still, Iraq could never be a Trojan horse for Iran. Its oil infrastructure and oil-export terminals could hardly support its own oil exports which have averaged 3.8 million barrels a day (mbd) in 2017 according to the 2018 OPEC Annual Statistical Bulletin out of a production of almost 5 mbd. Therefore, Iraq could hardly take any of Iran’s oil and export it with its own.

    Furthermore, Iraq has plans to reach a production level of 7 mbd by 2022. This will necessitate the building of a new Iraq-Turkey pipeline (ITP) to replace the damaged old ITP and bypass Iraqi Kurdistan territory altogether. It also needs to extend the Iraqi Strategic pipeline to the port of Aqaba in Jordan on the Gulf of Aqaba in addition to adding new export terminals on the Gulf. Were Iraq to be seen helping Iran to export some of its oil, the US will force western oil companies operating in Iraq such as ExxonMobil, BP and ENI to stop operations under the threat of sanctions. Without them, Iraq could not increase its production to 7 mbd by 2022.

    That is why Iraq could never be a Trojan horse for Iran’s oil.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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