Though OPEC has managed to achieve a high standard of compliance, it has mostly been due to the oversized cut by the largest member of the group—Saudi Arabia. Meanwhile, the actions and statements of the second and third largest producers in OPEC are throwing worrying signs at the oil bulls.
Saudi Arabia is in a catch 22 situation. As the defacto leader of OPEC, it is left to implement most of the production cuts to ensure a high level of overall group compliance. Saudis know that OPEC might not get another chance if it doesn’t adhere to its production cuts.
Another reason is the forthcoming IPO of Saudi Aramco. Without higher oil prices, Saudi Arabia might not get the valuation it is expecting for its crown jewel. Aramco’s successful listing is vital for reaching Saudi Arabia’s ‘Vision 2030’ objective.
However, two OPEC members, Iran and Iraq, are exploiting Saudi Arabia’s precarious position by taking steps to boost production. The Kingdom will have to contend with increased production from Iran and Iraq, along with tackling the U.S. shale oil producers.
According to the IEA, Iraq will increase its output to 5.4 million barrels per day by 2022, which is significantly higher than the earlier estimates of an increase to 4.6 million bpd by 2021. Similarly, Iran is expected to boost production by 400,000 bpd to reach 4.15 million bpd production in 2022.
The Iraqi Oil Ministry and the Iranian Oil Ministry have signed a memorandum of understanding to bury their differences on joint oil fields and build a pipeline to export crude oil from the Kirkuk fields, in the north of Iraq, through Iran, reported the Al Monitor.
Iraq, which produced 4.47 million bpd in January, well above its quota of 4.35 million bpd, is capable of raising its output to 5 million bpd in the second half of this year, said Iraq’s Minister of Oil, Jabbar Ali Al-Luiebi.
"We achieved this great achievement of 4 million barrels per day ... middle of 2016, and now we have climbed up and we are reaching about 5 million barrels per day beginning of second half of this year," Al-Luaibi said during an interview at CERA Week by IHS Markit, reports CNBC. Related: Oil Prices Continue Plunging As Speculators Rush For The Exit
This is bearish for oil because, along with Saudi Arabia, Iraq will also hold spare capacity that can be ramped up during supply outages.
"Obviously, it's bearish. They're going to have to show considerable production constraint having that spare capacity. That's the kind of capacity historically only the Saudis have had," said John Kilduff, founding partner at energy hedge fund Again Capital, reports CNBC.
Meanwhile, Iran has managed to increase its exports to 3 million bpd, its highest level since 1979. The landmark was reached for just a day, in the current Iranian month that began Feb. 19, said the Iranian Oil Minister Bijan Namdar Zanganeh, according to state news agency IRNA, reports Bloomberg.
Iran wants to increase its production to 5 million bpd by 2021. However, it needs investments by foreign investors to achieve that target. This will not be a new high in production for Iran, because it used to pump in excess of 6 million bpd in the 1970s, before the Islamic Revolution drove the western investors away. A fresh round of foreign investment is the key, which is yet to take off in Iran.
Nevertheless, with every major oil producer looking to boost production, the oil glut is here to stay.
By Rakesh Upadhyay for Oilprice.com
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Now they are back to being the swing player.
Time to reschedule that Aramco IPO.