LONDON: OPEC has a looming output problem. At some point, the 13-member group will probably try to prop up lowball oil prices by orchestrating a collective cut in supply.
The received wisdom is that a resurgent post-sanctions Iran might undermine cartel discipline by refusing to play ball.
Actually, it’s smaller neighbour Iraq that could wind up being the bigger problem.
Over the last two years cartel discipline amongst the Organization of the Petroleum Exporting Countries has gone out the window, as producers scramble to produce more oil to offset lower prices.
Despite fighting an internal war against Islamic State militants that has strained its finances and threatened its facilities, Iraq has been at the forefront of the splurge.
Since the middle of 2012 Baghdad has raised output by 1.2 million barrels per day (bpd), three-times the level of increase achieved by Saudi Arabia over the same period.
By 2020, capacity could climb to 6 million b/d, equivalent to about a sixth of OPEC’s current output.
Given this would exceed even a 34 million b/d output target, other members need to cut if Iraq keeps pumping.
There seems little incentive for Baghdad to join any effort to rein in supply.
It needs the money from heightened production to keeping fighting Islamic State.
And unlike Iran and Saudi Arabia, it has opened its doors to international oil companies such as BP, Royal Dutch Shell and Lukoil to secure investment into new infrastructure.
These groups’ shareholders have little to gain from the Iraqis agreeing to a pact that would potentially constrain their profits.
That leaves OPEC kingpin Saudi Arabia – the world’s largest exporter of crude – potentially fighting a two-way battle. Saudi’s negotiations with Iran are already fraught.
If Iraq joins forces with Tehran, it would represent a powerful counterbalance at the negotiating table.
Iraq was a founding member of the cartel when it was formed in Baghdad in 1960.
Its ongoing rush to pump more oil now is beginning to look like the biggest danger to OPEC breaking apart.
Copyright Reuters, 2016
Courtesy : BRecorder