A Fresh Extension for Production Cuts
In a recent meeting held on November 30, 2023, the OPEC+ alliance announced a voluntary reduction in oil production by up to 2.2 million barrels per day until the first quarter of the next year.
According to the statement released by OPEC+, these voluntary cuts, aimed at achieving stability and balance in the oil markets, will be gradually reversed based on market conditions.
Saudi Arabia has extended its previously announced reduction, which commenced in July of the previous year, by one million barrels per day until the end of March 2024. This is in addition to the Kingdom’s earlier reduction of 500,000 barrels per day, extending until the end of December of this year.
Russia has reduced crude oil production by 300,000 barrels per day and refined products by 200,000 barrels per day until the end of the first quarter of the next year.
Iraq follows with a voluntary reduction of 220,000 barrels per day until the end of March next year, added to the earlier reduction of 211,000 barrels per day until the end of December of this year.
Subsequently, the UAE is reducing by 163,000 barrels per day, followed by Kuwait with 135,000 barrels per day, Kazakhstan with 82,000 barrels per day, Algeria with a reduction of 51,000 barrels per day, and Oman with 42,000 barrels per day.
Despite these measures, the decision has not contributed to lifting oil prices, which experienced a significant decline of 5.2% in November. Prices hovered around the eighty-dollar per barrel mark.”
Global Economic Flexibility at Risk
Despite heightened tensions in the Middle East due to the Gaza conflict and concerns about the widening scope of the conflict, oil prices have not witnessed significant increases.
Several pressure factors hinder price surges to the $90 per barrel mark. Concerns about the global economic downturn still outweigh worries about supply disruptions or production cuts.
The Organization for Economic Cooperation and Development (OECD) has revised down its global economic projections from 3% to 2.9% for the current year, anticipating further growth slowdown to 2.7% next year.
Despite significant shocks to the global economy, such as the pandemic and the Ukraine war, the world economy has demonstrated considerable resilience still fraught with risks.
Despite some positive economic data for China in October, including economic activity recovery and industrial production growth, weak data on crude demand from Chinese refineries in December deepened concerns about the state of the global economy.
Uncertainty in oil markets has been compounded by the ambiguity surrounding the Federal Reserve’s interest rate decision. Global economic slowdown and rising inflation might compel the Fed to concede to further interest rate hikes, adding more pressure to oil prices.
In December, US consumer confidence experienced its fourth consecutive monthly decline, with rising inflation negatively impacting household inflation expectations.
The Biden administration turns to US crude inventories in an attempt to counter rising prices, with inventories decreasing by 817 thousand barrels in the fourth week of November. Additionally, US energy companies reduced the number of active oil rigs for the second consecutive week to the lowest level since January 2022.
OPEC+ Alliance Remains Cohesive, Yet…
While the OPEC+ alliance has maintained cohesion, the current economic data weakness, coupled with concerns about slowing growth momentum, has pressured the alliance to continue its production cut agreement, especially from Saudi Arabia and Russia.
This necessitates commitment and understanding from the rest of the members for the reduction decision to have a clear impact on the markets.
However, this consensus was broken by Angola, expressing its rejection of the agreement and announcing production levels that could reach 1.18 million barrels per day, exceeding OPEC’s specified quota of 1.11 million barrels per day.
This stance has raised numerous questions about the fate of the OPEC+ agreement if extended into the middle of the next year, amidst declining revenues for some countries and their inability to absorb the burdens of high inflation.
In October 2022, Iraq’s production reached 4.65 million barrels, but today, after the production cut agreement, this figure may drop to 4 million barrels per day in January of the upcoming year.
The reduction in oil production in Iraq, given the current conditions of the global oil market, represents a financial revenue loss. Oil prices have not risen to the desired level after the decision, which would have allowed Iraq to cover the budget deficit burdened with expenses.
Did Iraq Exploit the Halt in Kurdistan’s Oil Exports?
Iraq’s decision to voluntarily reduce production coincides with a decline in oil production in the Kurdistan region. The cessation of oil exports through Turkish ports has resulted in Iraq losing over eight billion dollars and a decrease in production rates.
Iraq is striving to maintain its oil production rates from its southern fields, attributing the production cut to the decline in Kurdistan’s output. The oil production in the Khormala field dropped by 60% within just two months, ranging from approximately 135 thousand barrels per day in March to 50 thousand barrels per day in late May. Meanwhile, Iraq increased its oil production by 11 thousand barrels per day during the same period.
Despite this increase, Iraq’s oil production during that period was less than its allocation in the OPEC+ agreement. Iraq’s oil production reached 3.955 million barrels per day, while its designated share in the agreement was 4.430 million barrels per day, a difference of 475 thousand barrels per day.
This figure closely aligns with the oil export numbers of Kurdistan, ranging between 400-450 thousand barrels per day, which Turkey refrains from exporting through its ports.
This may explain Iraq’s changing stance on the voluntary production cut. Although Iraq committed to the production cut agreement today, it had requested an exemption in November of the previous year, citing the need for financial revenues to cover the country’s reconstruction expenses.
Despite numerous attempts by Iraqi Prime Minister Mohammed Shia’ al-Sudani to reach a resolution for the Kurdistan oil export crisis through negotiations with the Turkish government, the Kurdistan Regional Government, and foreign oil companies operating in the region, some remain skeptical about the seriousness of these efforts and view them as potentially exploiting the situation for certain political gains.
International Pressure for Oil and Gas Legislation
Ankara is capitalizing on this situation as well. The Turkish Ministry of Energy, attributing the halt in Kurdistan’s oil exports to the earthquake that struck the southeast of the country, is exerting additional pressure on both Baghdad and Erbil to enact oil and gas legislation that regulates the relationship between the two parties.
Ankara fears a repeat of the fine scenario imposed by the International Court of Paris, which ruled that Turkey must pay $1.5 billion for exporting Kurdistan’s oil without the approval of the government in Baghdad.
The agreement between Baghdad and Erbil is crucial for the oil industry in Iraq, serving as a guarantee for other member countries of OPEC and the OPEC+ alliance to achieve stability in a country that is one of the world’s largest oil producers.
Many of these countries also express a desire to contribute to the development of the energy sector in Iraq and engage in joint projects.
On his part, the Prime Minister of the Kurdistan Region, Masrour Barzani, called for the formulation of an advanced federal law based on the constitution to address the issue of oil and gas, enabling the region to resume oil production and exportation.
This clearly emphasizes the importance of this matter in developing the energy sector in Iraq and encouraging foreign companies to invest in it.
In recent weeks, the Iraqi Ministry of Oil has conducted negotiations with the Oil Industry Association in the Kurdistan Region (APIKUR) to determine the nature and form of contracts with both APIKUR and the regional government.
These discussions aim to formulate contracts that suit all parties involved and safeguard their rights.
Crisis Begets Another
The cessation of Kurdistan’s oil exports impacts Iraq’s federal budget, which includes a provision based on exporting no less than 400 thousand barrels per day from the region. This adds pressure to Iraq’s budget for the year 2023, with funds yet to be released as the year approaches its end.
This situation has led to a crisis in the salaries of employees in the Kurdistan Region, as both parties try to reach a common formula for disbursing those salaries.
It affects the future of the Iraqi economy and its ability to overcome the recession it is facing.
The Iraqi dinar has depreciated against the dollar by more than a third of its value in less than two years, while many investors struggle with an unstable decision-making environment amid fluctuating exchange rates and a crisis of confidence in the banking sector.
Therefore, attention to the stability of the energy sector, being the country’s largest financial source, requires consensus and understanding among all parties involved in energy production.
The high production capacities of the region, whether related to oil fields or the anticipated future in natural gas, will play a crucial role in transforming Iraq into an attractive investment destination and a supporter of development.
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