Talks to extend OPEC+ production cuts hit an impasse on Thursday after Iraq said it will only be able to reach its output target at the end of July, defying an ultimatum from Saudi Arabia and Russia to stop cheating on the deal.
While Moscow and Riyadh have already agreed they should continue record supply cuts for an extra month -- instead of easing them in July as previously planned -- they will only do so if all other countries implement their pledged cuts in full.
Nigeria, Angola and Kazakhstan have given sufficient assurances that their compliance will improve, but Iraq has not, said people familiar with the matter. In a letter to fellow members, the Oil Ministry in Baghdad asked for more time and consideration of issues, such as Kurdish autonomy, that make it difficult to cut, the people said.
“Saudi Arabia is taking a zero tolerance approach to cheating, but it’s unclear how they can get Iraq to actually comply with the deal,” said Mohammad Darwazah from consultant Medley Global Advisors.
Several days of fruitless talks this week, in which old OPEC+ tensions have resurfaced, carry considerable risk for oil prices. If the cartel can’t agree to modify its current deal, millions of barrels a day of fresh supply could return next month to a market that is only tentatively recovering from the coronavirus lockdown.
Brent crude, the international benchmark, fell 0.5% to $39.59 a barrel as of 5:21 p.m. in London.
The 23-nation partnership between the Organization of Petroleum Exporting Countries and other major producers has helped engineer a doubling in Brent prices since April. But if the Iraqis don’t shape up then Riyadh and Moscow are warning they will start to phase out the supply curbs that are putting a floor under the market.
The kingdom and the Kremlin are pushing the stragglers hard -- not just demanding they implement the cuts already promised, but asking for deeper curbs in the coming months to compensate for their earlier failings.
Such penance would be difficult for Iraq to accept. It made less than half of its assigned cutbacks last month, so compensating fully would require it to slash production by a further 24% to about 3.28 million barrels a day, according to Bloomberg calculations.
For a country still rebuilding its economy following decades of war, sanctions and Islamist insurgency, that’s a tall order. Resisting the temptation of selling crude during the current market rebound, which has brought prices back to about $40 a barrel, may prove impossible.
While Iraqi Finance Minister and Acting Oil Minister Ali Allawi did pledge to improve compliance with pledged cuts in an unusual Twitter post on Tuesday, he didn’t go any further. The government risks a backlash from parliamentarians and rival political parties if it accedes to foreign pressure, and foregos oil sales while contending with a federal budget gap.
The letter from Iraq’s Oil Ministry didn’t address the issue of compensation, the people said.
The Organization of Petroleum Exporting Countries and its allies pledged in April to slash oil output by 9.7 million barrels a day, or roughly 10% of global oil supplies, to offset the unprecedented collapse in demand caused by coronavirus lockdowns.
A few weeks later, Saudi Arabia and its closest allies in the Persian Gulf promised additional supply restraint of 1.2 million barrels a day in June.
Riyadh and Moscow are aligned on continuing cuts at the current level for an extra month beyond July 1, according to people familiar with the matter. But if they don’t receive assurances from Iraq by their next meeting -- currently scheduled for June 9-10 -- the group’s daily supply curbs will ease to 7.7 million barrels for the rest of the year.
Meetings of the Joint Technical Committee and Joint Ministerial Monitoring Committee, which oversee the deal, have been scheduled for June 17 and 18, respectively, said delegates.
Enforcing better compliance among OPEC+ nations has been a motif since Saudi Energy Minister Prince Abdulaziz bin Salman was appointed.
In his first public outing after becoming energy minister, in Abu Dhabi last September, the prince was literally applauded for securing loud pledges of atonement from Iraq and Nigeria.
But his tenure has also been stormy, and the latest move has high stakes. In March, the prince’s attempt to force Russia to make deeper output reductions backfired spectacularly, splintering the entire alliance and igniting a destructive price war.
Two months ago, Prince Abdulaziz achievement in successfully restoring the OPEC+ coalition and forging an agreement for historic production cuts was delayed and ultimately overshadowed by a spat over Mexico’s contribution to the deal.
If OPEC+ can resolves the issues with Iraq, the impact on the oil market could be dramatic. After the massive oversupply earlier this year, Russian Energy Minister Alexander Novak predicts there could be a supply deficit of 3 million to 5 million barrels a day next month, Interfax reported. That’s roughly in line with projections from an OPEC committee that met on Wednesday, a delegate said.
That would provide a stronger foundation for the crude price recovery, and also allow the cartel to start chipping away at the billion-barrel stockpile surplus that’s built up during the coronavirus crisis.
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