Iraq’s crude oil exports jumped in the first half of February even after Opec’s second-biggest producer pledged to cut production this month.
The group and partners including Russia are restraining supply with the coronavirus pandemic still raging. The alliance, known as Opec+, is seeking to ensure a 66% rally in crude prices since the start of November – driven by vaccine breakthroughs – isn’t reversed.
Baghdad pledged to pump below its quota in February to make up for past overproduction. Still, the pace of its crude exports in the first half of the month, if maintained through the rest of February, indicates the country may exceed its self-imposed production target of 3.6mn barrels a day and perhaps even its Opec+ cap of around 3.85mn.
Iraq derives almost all its income from oil and, like many other petrostates, is experiencing an economic crisis after the pandemic caused energy demand to collapse last year.
The Iraqi oil ministry didn’t immediately comment when asked about exports. The country still intends to meet its target for the full month, according to an industry official who asked not to be identified.
A separate official said the government planned to increase exports during the first half of February in anticipation that bad weather could reduce them in the second half.
Exports aren’t a direct gauge of production but give an insight into output levels. Countries can sell down stockpiled oil, which doesn’t count toward their Opec+ quotas. Additionally, tanker-tracking figures compiled by Bloomberg are preliminary and daily averages can change over the course of the month.
Iraq may be betting the Opec+ deal is “too important to fall apart over some failure to compensate,” said Robin Mills, head of Dubai-based consultancy Qamar Energy. “They need the revenue.”
The nation’s daily crude exports rose to 3.44mn barrels in the first 14 days of February, according to tanker-tracking and port-agent data compiled by Bloomberg. That’s up 4.4% from January and the highest figure on a full-monthly basis since May, when Opec+ began its unprecedented supply cuts.
If Iraqi exports remain at their current pace and the country consumes the same amount of oil domestically as it did in January, it could pump nearly 4mn barrels a day this month.
Iraq’s dire economic situation and inability to control output from fields in the semi-autonomous region of Kurdistan led it to over-produce by around 80,000 barrels daily between May and December. Only Russia has violated the Opec+ agreement to a greater degree, according to data compiled by 

Opec+ under pressure to boost output as oil climbs towards peak

Saudi Arabia’s oil minister has called for a cautious approach to raising production, even as prices surge and many traders anticipate an increasingly severe shortage of petroleum later this year.
“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” the minister said in a speech on Wednesday.
In contrast, futures markets point to a rapid tightening of supply, with front-month Brent up more than $25 per barrel or 65% in just over three months since successful vaccine trials were announced in early November.
Brent’s six-month calendar spread has surged into a backwardation of more than $3.70 per barrel, putting it in the 94th percentile for all trading days since 1990, and indicating traders expect a rapid depletion in oil stocks.
The spread was this strong for brief periods during 2019 and in the first few weeks in 2020, flashing expected tightness, but the last time it was this tight on a sustained basis was in 2013.
Disagreements between the Saudi oil minister and traders about the forecast balance between production and consumption historically have been common at this point in the price cycle.
Saudi Arabia and other producers in the Organization of the Petroleum Exporting Countries, as well as the broader group of allies led by Russia (Opec+), tend to be over-pessimistic about consumption early in the upswing.
Part of the reason is fear of a return to low prices and revenues when memories of the recent slump are still fresh. “The scars from the events of last year should teach us caution,” as the Saudi minister said on February 17.
But producers also have a financial incentive to err on the side of caution. Under-forecasting consumption and over-forecasting production leads to a rise in prices and revenue windfall.
“If we have to err on over-balancing the market a little bit, so be it. Rather than quitting too early and finding out we were dealing with less reliable information... stay the course,” Saudi Arabia’s previous oil minister said almost exactly three years ago in February 2018, when prices and spreads were at the same level they are now.
Rising prices are beneficial for government finances in the short term, even if they create the conditions for over-production and another slump in the long term.
The result is that it is quite normal for Opec to be wary of raising output at this stage in the cycle – even as prices rise, inventories shrink and the market moves into a pronounced backwardation.
Opec’s slowness in raising production typically causes inventories to fall below average, and prices to overshoot on the upside, until a rise in output from non-Opec producers causes prices to peak and then start to fall.
Speaking this week, the Saudi oil minister had a warning for any traders or analysts trying to guess how Opec+ will respond to the recent rise in prices: “On the subject of predictability, this also applies to those who are trying to predict the next move of Opec+ . To those I say – don’t try to predict the unpredictable.”
In fact, the outline of the price cycle and Opec+ responses to it are both broadly predictable, in the sense that they follow a regular pattern of moves.
Every price cycle is slightly different.
Some slumps are triggered by recessions, others by volume wars.
And Opec+ ministers come and go.
But the basic decision-making framework and incentives stay largely the same.
The precise timing and magnitude of peaks and troughs cannot be forecast because the market is a complex adaptive system that has some chaotic features.
But the broad pattern of rising and falling prices, production, consumption, inventories and spreads, as well as Opec’s response to them, follows a familiar sequence.
The cycle can be split into a series of phases.
The exact number is somewhat arbitrary and the phases can overlap and not be fully distinct.
Both a basic 4-phase and a more elaborate 6-phase version, but it can be split into even more phases if necessary.
The recent fall in inventories, rise in spot prices, and shift towards a steep backwardation, indicate the market is moving towards a peak (Phase II in the six-phase version of the cycle) or peaking (Phase III).
In previous cycles, at this point Opec’s resolution to continue restricting output would weaken (Phase II) and it would come under pressure to curb price increases by boosting production (Phase III).
The current upswing appears to be following the same pattern.
In late 2020 and early 2021, several members of Opec+ pushed for output increases and compliance appears to be fading for many members.
With prices surging, the organisation already faces increasing calls to start boosting output or risk a resurgence of drilling and production from US shale firms.
With inventories shrinking rapidly, the speed with which Opec moves from Phase II to Phase III is likely to determine the eventual timing and scale of the overshoot – as well as the timing and depth of the subsequent slump.

* John Kemp is a Reuters market analyst. The views expressed are his own
Related Story