Iraq: OPEC's Problem Child

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Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, USOI, UWT, WTID, WTIU
by: Daniel Jones

Summary

In this article, I decided to look at some data stemming from Iraq and compare it to expectations for the nation.

Of all the players participating in the OPEC cut, Iraq is the one nation seriously underperforming.

OPEC needs to crack down on Iraq in order to take the burden off other nations and to rebalance markets faster.

This situation does present some risks for oil market participants.

This year has been a pretty interesting ride for oil. Right now, prices appear to be trading near the low-end of a specific range of about $45 to $55 per barrel amidst fears of not only higher US output but also because the market fears that OPEC may be backtracking on its production goals. In what follows, I want to dig into some data that shows it's not OPEC that has been the problem but, rather, one of its members. No, I'm not talking about Libya or Nigeria here but am talking about, instead, a larger player in the group than both of these combined.

OPEC has had nice compliance

Last year, OPEC decided, after a two-year long war on US shale, to finally cut production to the tune of around 1.2 million barrels per day. They also negotiated cuts with some non-OPEC nations, namely Russia, to slash nearly 0.6 million barrels of extra oil from the market as well. Prices surged initially and everybody, myself included, thought the road higher would be easier than it ended up being. There was also a concern (not from myself but from others) that OPEC wouldn't honor their pledge. That said, on the whole, OPEC has defied those expectations and has cut.

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If you look at the graph above, for instance, you can see the goal OPEC set for itself last year in terms of production. This data excludes output from Libya and Nigeria since both of those nations were exempt from cuts. It also excludes Equatorial Guinea since it's a new addition to the group and had no specific limit set. In the graph, you can also see how OPEC's production has looked, using the group's own estimates, compared to their goal. In the next graph below, you can see the difference between these two figures.

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Overall, OPEC's work, less what has been done by Libya and Nigeria, has been phenomenal. By my math, if you look at the output, production has been mostly lower each month. Sure, as you can see in the graph below, June was bad with 1.56 million barrels produced in excess of what was planned, but total output since the start of this year has been 5.41 million barrels below what OPEC said they would pump out. This shows commitment but, most importantly, it should help to reduce the global oil glut faster.

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Iraq's a problem

While OPEC, on the whole, has done well, the same cannot be said of Iraq. If you look at the graph below, for instance, you can see the nation's average daily output, reported each month, compared to what the nation promised to produce last year. Not one single month has the nation reported at or below its target. It's best month was April, when production averaged just 30 thousand barrels per day above the goal but, since then, output has moved higher. In June, production was 0.15 million barrels per day higher than the country promised last year.

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In the next graph, as shown below, you can see that this isn't even the worst of it. You see, while OPEC reports its own estimates of output for each of its member nations, some nations provide their own estimates of what they produced. As you can see, Iraq isn't even trying to hide the fact that they are producing above what was agreed upon. In fact, they may even be proud of it since the country's own estimates put oil production quite a bit higher than OPEC's own estimates. Generally speaking, I am inclined to believe data like this over estimates, but I don't know what to make of this situation.

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If we assume that OPEC's estimates for Iraq are correct, we can generate a graph like the one below. In it, you can see that oil production from the group as a whole would have been consistently below the target if Iraq had behaved accordingly. The best month would have been a draw from the group totaling 6.42 million barrels, while aggregate production over the first six months of this year would have been 21.53 million barrels lower than under perfect adherence to their plan.

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Iran: the good scout?

Besides Saudi Arabia, which has been doing most of the heavy-lifting this year, another interesting nation is Iran. Last year, one common fear I heard from oil bears was that the country would never cooperate on a cut with the rest of OPEC, largely due to its animosity toward Saudi Arabia and other Sunni-majority nations. Certainly, from a political perspective, this makes sense but, as I have always believed, politics only has a short-term sway while economics will always drive things in the long run.

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Sure enough, as you can see in the graph above, Iran has done really well in terms of adhering to its target of 3.797 million barrels per day. Five of the past six months have seen production average below that (February was the exception). On the oil front, I believe that Iran is the most likely to destroy the existing oil deal because of political concerns but, even so, the nation has managed to behave because it knows that doing so, especially when Saudi Arabia has cut beyond expectations, is in its own best interests. This means the fear that Iran may exit the deal at any point is probably vastly overstated.

Takeaway

Based on the data provided, it seems to me that OPEC, as a whole, has been doing its job. Sure, it's bad to see Libya and Nigeria both increase output, but that was largely expected. What's not expected, however, is to see Saudi Arabia and other nations do all the heavy-lifting to offset Iraq's shortcomings. While I am certainly still bullish on oil, I believe that OPEC needs to pressure Iraq to fulfill its end of the bargain because, not only will it help the market rebalance, but it might increase the sense of unity among the group. A continuation of the country not adhering to the group's agreement may otherwise unsettle things and pose a risk for oil bulls.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.