OPEC’s Oil Deal is on the Brink of Collapse, and This is the (Unexpected) Culprit

When it comes to the international oil market, geopolitics always trumps market dynamics. That’s just how important securing oil is to modern governments – and how crucial it is to control the flow of oil to other countries.

Sometimes, these non-market factors can sway the oil market directly. Yesterday was a great case in point.

That’s when Iraq’s oil minister, Jabar Ali al-Luaibi, announced that his government wanted an exemption from any production limit agreed to at OPEC’s next regular meeting, scheduled for November 30 in Vienna.

That’s quite the change from less than a month ago, when Baghdad said it was on board with OPEC’s oil production cap.

But here’s the thing. This change of mind wasn’t even the worst thing the Iraqi oil minister said…

His comments included an even more concerning claim, overlooked by the media. A claim that threatens to get Iran involved…

And could bring down the whole OPEC oil deal…

OPEC Has to Reintroduce Quotas

As you’ve seen here in Oil & Energy Investor before, neither Iraq nor Iran have had OPEC production quotas in years. Of course, the rest of OPEC hasn’t abided by their quotas, either. Instead, everyone has kept their taps wide open over the past year

This was part of the global oil market’s descent into a self-destructive, zero-sum game. Each producer, OPEC or non-OPEC, sought to enhance its market share and the expense of others.

In this environment, OPEC simply suspended the quotas, since nobody – including OPEC’s leader Saudi Arabia – was abiding by them anyway.

But the proposed production cap that OPEC is currently negotiating will require that the quotas be reintroduced – and that countries stick to them.

The quota-setting process remains the same. First, OPEC determines monthly overall global oil demand. Then, the cartel subtracts non-OPEC production. The remainder is called the “the call on OPEC” – the amount of oil that OPEC is “called on” to supply to global markets.

Traditionally, this “call” would then be divided up among the members, creating their quotas.

But the introduction of quotas for Iran and Iraq has caused angst among the lower tier of less-important OPEC countries, such as Venezuela, Libya, Angola, Ecuador, and even Algeria. Their concern is that Iran’s and Iraq’s quotas will come at the expense of other members.

Of course, Iran and Iraq have both been producing and selling oil even without quotas. But those totals have not been included in OPEC’s monthly totals. Once they are, the quotas of every other member will have to get smaller in response.

And now Russia is making this even more difficult…

Russia is Sending Mixed Messages

Russia’s participation is essential for any oil production cap to work, as it is the primary non-OPEC global producer. Now, the Russian Ministry of Energy (Minenergo) and the Kremlin have both indicated that they agree with and support the production cap. Unfortunately, that puts President Vladimir Putin in an uncomfortable (and public) disagreement with his erstwhile ally, a certain Igor Sechin.

Sechin just happens to be the head of Russia’s state oil production major Rosneft. The company needs to secure funds from a proposed privatization of another segment of the company, although it is still undecided on which international exchanges the float will occur.

Last time something like this happened, when 25% of Rosneft was floated, it took place on the London Stock Exchange. These days, the continuing UK-sponsored Western sanctions against Moscow make that unlikely.

As a result, an additional pre-Vienna meeting is now likely to be held in Riyadh. And there is no real chance that OPEC will agree to a cap if the Russians are not on board.

But yesterday’s wrinkle from Baghdad puts focus once again on OPEC’s real quandary. And that directs attention to the so-called Shatt al-Arab. This waterway is the confluence of the Tigris and Euphrates rivers, and makes up the southern border between Iran and Iraq.

What transpires on both sides of the Shatt al-Arab will determine whether a binding cap is even possible the next time OPEC meets. Tehran seems to be on board, at least for the moment. But the Iranians also have their own agenda…

Iraq’s Preposterous Production Goals Threaten to Rile Up Iran

Both Iraq and Iran are intent on recovering from depressed domestic oil production. For Iraq, the cause has been a long period of war, insurgency, and terrorism. For Iran, the problem has been the years of Western sanctions on oil exports.

Each has production goals that create major concerns for other OPEC nations. Iran wants to return to pre-sanction production levels. At current production trends that may be within reach, amounting to probably another 200,000 barrels of oil per day or so.

Of course, as I’ve discussed here before, this level would only be achieved “on the books,” since a range of fields and infrastructure problems will prevent it from being sustainable.

Iraq, on the other hand, is another matter. Right now, the country produces about 4.7 million barrels a day, although that number too is uncertain and probably unsustainable.

Unfortunately, Baghdad is once again touting a completely unrealistic production goal of more than 9 million barrels a day. Iraq first put forward that figure a few years back, which was promptly ignored by anybody with any knowledge of the country’s and region’s production capacity.

But yesterday, in his announcement that Iraq wants an exemption from OPEC’s production cap, Iraqi Oil Minister al-Luaibi once again gave this preposterous production goal.

Now, so far, these are just words.

But as soon as Iraq makes any moves that suggest it is seriously trying to almost double its current oil production, Iran, on the other side of the Shatt al-Arab, will respond quickly, and in kind.

And this demand/counter-demand tussle will make any OPEC production cap much more difficult to achieve.

I’ll keep you informed about the progress of these negotiations as we get closer to the November 30 OPEC summit in Vienna, right here in Oil & Energy Investor.

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