OPEC’s Most Unpredictable Member

November 27, 2017

This time last year, Iraq was asking OPEC to be exempt from the oil production cuts because it desperately needed revenues to fund the fight against Islamic State. Iraq failed to win the exemption, while Libya and Nigeria succeeded in convincing the cartel that they should not be restricted to pump as much as they can after their respective productions had severely suffered from civil strife and militant activity.

A year later, Libya and Nigeria appear to have gradually recovered and stabilized their crude oil production. But OPEC’s second-biggest producer, Iraq, has become the new wild card in the cartel, with wild swings in its oil production following the referendum in Kurdistan and the clashes between Iraq’s federal forces and Kurdish fighters in the oil-rich Kirkuk area.

In recent weeks Iraq has turned into an unpredictable source of oil supply to the market, giving OPEC yet another headache in gauging supply and demand and the much-hyped rebalancing of the market.

But OPEC’s troubles with Iraq has been going on for over a year. First, in the talks leading to the original production cut agreement, Baghdad wanted exemption. Then it disputed the secondary sources that OPEC uses to measure the members’ production and that are the basis to calculate quotas and compliance. Then the production cut deal started in January, with Iraq agreeing to cut 210,000 bpd off its October 2016 level, and keep production capped at 4.351 million bpd.

Related: U.S. Oil Rig Count Rises Amid Record Breaking Production

But Iraq never fully complied with its share of the cuts, according to OPEC’s secondary sources, and has been the biggest cheater on this deal. The only time Iraq came close to the 4.351 million bpd level this year was in October—4.383 million bpd. Yet, this drop in production wasn’t due to Iraq’s willingness to finally fall in line and stop its cheating ways. It was due to the disruptions in oil production in the north after Iraq’s government forces completed in mid-October an operation to seize control of all oil fields that state-held North Oil Company operates in the oil-rich Kirkuk region from Kurdish forces.

Analysts expect production disruptions to continue in the coming months, which further complicates OPEC’s ability to predict how much supply Iraq—as well as Libya and Nigeria—will be bringing to the market in the nearest term. This adds another unknown to the cartel’s dilemma of figuring out just how long the cut extension should be.

In just one month, Iraq turned from cheater to complainer, after clashes in Kurdistan added some geopolitical risk premium to oil prices.

Over the past month, Iraq has boosted its oil exports from the south to near-record highs in an attempt to offset the drop in exports from the northern Kirkuk-to-Ceyhan route. It hasn’t managed to fully offset that drop yet, but it is thought to be willing to raise oil production despite OPEC constraints.

“Production will remain volatile,” Issam Chalabi, a former Iraqi oil minister and now consultant, told Bloomberg. Iraq’s “real intention is to reach the 5 million-barrel mark by year-end. Politics is the name of the game,” he said.

“The disruptions involving the Kurds could last another six months,” Jaafar Altaie, managing director of consultant Manaar Group, which operates in Iraq, tells Bloomberg. “Iraq will still be cheating, but the cheating will be intermittent and it will be disruptive,” Altaie noted.

Swinging between exceeding the OPEC-designated quota and disruptions due to regional geopolitical risk, Iraq’s oil production is now another wild card for OPEC and the oil market.

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