Saudi Arabia faces deeper OPEC cuts after Iraq opts out of deal
Saudi Arabia faces the prospect of much deeper — and financially painful — oil production cuts after Iraq joined the queue of group members seeking immunity from the deal hatched in Algiers.
In addition to Iraq, the secondbiggest exporter in the group, Iran has already sought to exclude itself. Output is also recovering from fields in Nigeria and Libya, two more countries that were exempted from the Algiers deal because violence has wrought havoc in their oil industries. Taken together, more than a third of OPEC’s production now stands outside the plan.
Iraq’s plea to be left out prompted Olivier Jakob, a consultant at Petromatrix GmbH, to that the oil club stood for the “Organization of Producers Exempt from Cuts.”
The worsening OPEC equation presents Saudi Arabia with a difficult choice after its Algiers U-turn: carry a greater burden within the group, ceding market share to other producers, or lose credibility by softening the terms of the deal.
In a worst-case scenario, Saudi Arabia will have to cut production by more than one million barrels a day, sending the kingdom’s output to a two-year low.
While oil has rallied more than 15 per cent since Algiers, the growing cost of following through is becoming clear. During the last two weeks, Saudi Arabian Energy Minister Khalid Al-Falih has appeared to give himself room for manoeuvre.
In a speech in London last week, he mentioned the possibility of an OPEC freeze as well as a cut. He’s also stressed the need for nonOPEC nations to take part in a global deal to manage supply.
“Oil markets started moving into balance recently, but we in OPEC, along with producers from outside the group, started intense consultations to take the right action to quicken the rebalancing and market recovery,” Al-Falih said Sunday in a speech.
In Algiers, OPEC agreed to reduce its production to a range of between 32.5 million and 33 million barrels a day. That means for Saudi Arabia and other countries willing to cut, the numbers look like this. In a best-case scenario — based on Nigeria meeting its target to restore production, Libya maintaining recent improvements and Iran, Iraq and Venezuela staying at September levels — reductions of 1.3 million barrels a day would be required to meet the top end of the Algiers target.
In a worst case, where Iran, Iraq and Venezuela produce more than they did last month, that rises to over two million barrels a day, based on Bloomberg calculations.
“Everyone has a lot to lose if they do not fill in the details and implement a final agreement at the end of next month,” said Mike Wittner, global head of oil research at Societe Generale SA. “Of all the developments, the one that worries me the most for posing an issue for the other members of OPEC is Iraq.”
OPEC representatives and counterparts from countries outside the group will meet in Vienna later this week to discuss how the burden of output cuts is shared. The most contentious topic is likely to be how the production of individual countries is measured..