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Iraq and oil

Date:

07/04/2016


Iraq and oil

According to the latest “Oil Market report” of the International Energy Agency (IEA), after the terrible fall of the oil price recorded in 2015 and at the beginning of the current year, the oil market seems to have reached a new equilibrium. Indeed, the analysts expected for the first semester of 2016 a progressive rebalancing of the oil international market, characterized not only by an increasing price per drum but also by a consistent stockpile of surplus of production. In reality, during these months, the price per barrel has increased but the oil production surplus has not augmented in the way experts have imagined. In fact, expectations considered an increase of the surplus of an amount of 1.5 billion barrels per day, whereas at this very moment the surplus of oil production has registered a growth of only 0.8 mb/d. This data permits to clarify the movements and the tendency of demand and supply in the oil international market, producing new expectations for the upcoming months of 2016. In particular, the evident trend of the first half of the current year is the significant growth of the demand that has been accompanied by a consistent reduction of the oil supply, due to the several events affecting OPEC and other exporting countries. These circumstances, along with the decrease of the production due to the fall of oil price in 2015, have caused a slower growth of the surplus production, suggesting to the analysts a considerably different scenario compared to the one expected.


In this context, the Iraqi oil market seems to have a very diverse tendency in comparison to the trends of the international market. In fact, whereas in most of the producer countries a significant reduction in production has been registered and, consequently, a consistent drop in exports and oil revenues, Iraq has surprisingly gained almost 3.745$ in the month of may alone, with an export forecast of 3.2 million barrels per day, not only one of the most consistent revenues from oil registered in the latest eight months but also a significant result considering the 5% fall of the oil exportations. Moreover, the profit gained in May represented a very important achievement considering that a similar revenue has not been registered since august 2015, when revenues coming from oil reached a level of 3.925$. Surely, the overall increase of the oil price, that in may was 37.753$, far from the 28.40$ and 33.38$ registered respectively on march and april, has been a favorable element for the Iraqi oil market. Furthermore, notwithstanding the diminution of the exportations, a deep crisis in the Iraqi oil market has been avoided also thanks to the introduction in the market of a new typology of crude, the Basra Heavy, that permitted to Iraq to sell a new product and satisfy the demand of a heavier type of oil. The Basra Heavy has been so much appreciated by the market that only in May it constituted already 25.8% of total exportations, increasing revenues of 3.5/4 billion of dollars. Certainly, as the Iraqi Vice Minister of Oil Fayadh Nema has declared during an interview released in the aftermath of a meeting of the OPEC countries, there are still many important improvements that have to be introduced in the Iraqi oil sector, that remains the main source of profit for Iraqi economy. In particular, it is necessary to encourage the international oil companies to invest in Iraq and in order to do so it is fundamental that the Iraqi Government concentrates its efforts to develop the needed production infrastructures, in order to enable them to sustain an increased production. In this sense, the Iraqi Ministry of Oil is working together with the international oil companies to reach production and sales standards able to minimize the expenses and maximize the profits. In this context, both the parties involved are considering to act in two ways: first of all the Iraqi Government will align the international oil companies’ remunerations to the oil price, in fact with this operation it is very likely that when the price will increase the revenues will increase at the same level; secondly, a specific equation will be implemented in order to calculate the cost of each barrel produced, according to which a significant saving will correspond to an equal profit. This solution is still waiting to be evaluated and implemented, but surely it will not modify the previous agreements between the Iraqi Government and the international oil companies, trying not to influence negatively the expectations and the tendency of the market. Considering all these elements, it is estimated that Iraqi oil sector will face many adjustments, especially in the fields of production and expense policies, and that these modifications will be characterized by the strong collaboration with oil companies, keeping in mind the common objective of maximizing the revenues.


In general, as stated in the latest IEA report of the 14th of June, the expectations for the upcoming semester of 2016 for the international oil market, indicate a further adjustment of the market, with a production surplus stock destined to slowly increase. In the same document, there are illustrated the expectations for the first months of 2017. In particular, experts expect that the demand of oil will grow with the same rate of growth of 2016, around the 1.3 mb/d, and that the non-OPEC countries’ supply will grow with a rate of 0.2 mb/d. The stock of oil will face a slow growth in the first semester and will stop growing for the rest of the year. Certainly, these are just the first considerations regarding a market that in the last years has been extremely volatile and affected by a series of external and complex events which have an impact on production and exports. Any definitive conclusion is still premature.


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