What OPEC Cut? Iraq Is Boosting Its January Oil Exports By 7%

In an "unexpected" twist, the WSJ reports  that instead of cutting its crude production by 4% as it "promised" it would do in the Vienna November 30 meeting, Iraq instead plans to increase crude-oil exports in January, according to government records, immediately raising questions about its commitment to the OPEC’s landmark production agreement. Iraq’s national oil company, the State Organization for Marketing of Oil, or SOMO, had plans as of December 8, nine days after agreeing to cut production, to instead increase deliveries of its Basra oil grades by about 7% to 3.53 million barrels a day compared with October levels, according to a detailed oil-shipment program viewed by The Wall Street Journal. Those oil shipments represent about 85% of Iraq’s exports.

The list of planned tanker loadings has been circulated among potential buyers so they can gauge its availability.

When asked by the WSJ to explain this curious discrepancy, SOMO chief Falah al-Amri declined to comment about the company’s January export levels. Iraq’s oil minister, Jabbar Ali al-Luaibi, has said he would instruct SOMO to act on the OPEC output-cut agreement.

As a reminder, Iraq agreed to cut its output by 210,000 barrels a day from October levels of 4.561 million barrels a day. The country’s oil officials were among the most reluctant to go along, disputing OPEC’s statistics and threatening to pull out of the agreement until the last minute because it needs the oil revenue to fight its war against Islamic State. Iraq says it has increased its output to 4.8 million barrels a day in 2016, from less than 3 million barrels a day a few years ago, using Western and Chinese oil companies to tap into its deep crude reserves.

Realizing that the oil cut charade was in jeopardy, on Wednesday, several hours after a Wall Street Journal article on Iraq’s oil-export plans, OPEC Secretary General Mohammad Barkindo said he planned to ask members in writing on Thursday to announce their future oil-export programs. While OPEC asks members to disclose their production, it would be unprecedented for the cartel to ask countries to announce the levels they export.

“I just thought I should write the ministers to avoid complacency,” Mr. Barkindo said in an interview.

It wasn't just Iraq however.

Even more amusing was a report by Bloomberg that Aramco, the Saudi Arabian Oil Company, has signed contracts with U.S. companies to build dozens of oil rigs over 10 years as the kingdom builds for the long-term future of its most prized industry even "while coordinating with other producers to cut output for six months to stabilize crude." The Saudi state producer signed a contract with Nabors Industries Ltd. to form an equally shared joint venture to build 50 onshore rigs over a decade, its Chief Executive Officer Amin Nasser said at an energy event in the eastern city of Dhahran. Saudi Aramco also signed a deal for a similar venture with Rowan Cos. to construct 20 offshore rigs over 10 years, he said.

In other words, for OPEC nations the production cut is nothing more than a stopgap agreement to fool market participants that they are cutting even as most are already laying plans for an immediate boost of production, in the case of Iraq, or a delayed expansion in the case of the biggest OPEC producer, Saudi Arabia.

And then there are the laggards. According to an analysis by oil consultancy firm Petromatrix, OPEC will produce at least 33.3mmb/pd in January, as a result of the restart of oilfields in western Libya, which will leave OPEC supply approximiately 800kbpd above the 32.5mmbpd target.

As Petromatrix notes, “the consequence of that is, first, there will be no global stock draw in 1Q 2017. Second, Russia can point at OPEC’s non-compliance to lower its own compliance." It also means that “OPEC will have to meet again or risk losing the participation of Russia and the faith of the market.”

Petromatrix' conclusion: OPEC members “will prevent oil from going back below $40, but I don’ think it’s enough to bring oil back above $60.”

Perhaps the biggest indicator that oil has topped out for the time being was Dennis Gartman's flip-flopping to long when WTI was just shy of $55 two days ago, which once again managed to top tick the market with uncanny precision.