OPEC is nearing the end of a six-month agreement to cut its collective production (along with 11 other non-member petrostates) to try and cut away at the global glut of crude and kick off a price rebound, but not all of its members are adhering to the plan. The UAE and Venezuela both missed their cut targets, but as Bloomberg reports, Iraq was the worst offender:
Iraq pumped about 80,000 more barrels of oil a day than permitted by Organization of Petroleum Exporting Countries curbs during the first quarter. If that deal gets extended to 2018, the nation will have even less incentive to comply because capacity at key southern fields is expanding and three years of fighting Islamic state has left it drowning in debt. […]“I doubt Iraq will cut any more in the second half than it has already,” said Robin Mills, the Dubai-based chief executive officer of consultant Qamar Energy. It may instead produce more as it completes maintenance at several fields, new ones start production and seasonal domestic consumption rises, he said. There are some signs this has already started.
80,000 barrels per day isn’t much in the grand scheme of things (the petrostate cut plan reduced supply by roughly 1.2 million barrels per day), but it could get worse in the coming months as Iraq’s capacity increases. But this isn’t just a substantive problem—to the extent that it sends a signal to other petrostates that it’s alright to break ranks, it’s a symbolic one as well:
A risk, though, emerges if Iraqi compliance worsens to such an extent that other countries in the 13-member group start cutting corners too, exacerbating a global surplus that’s already erased much of the gains that unfolded after the deal was struck in November.
The Saudis are the only player capable of offsetting this non-compliance by increasing their own cuts, but Riyadh already has its hands full leading this clash between conventional state-run oil producers and upstart, non-conventional suppliers (read: U.S. shale firms). The last thing the Saudis need right now is a scab, but that’s the role Iraq seems intent on playing in this high-stakes drama, and it seems likely things will get worse if and when OPEC & co. agree to extend cuts through March on Wednesday.