Iraq seen 'collateral damage' to Saudi-led oil price war and it couldn't be at worst time

Dubai — Iraq will suffer more than most Middle East oil producers amid a Saudi-led price war that is flooding the market with cheap crude as OPEC's second largest producer is already struggling with political unrest and a leadership vacuum that will leave it with few petrodollars to manage its energy-dependent economy.

Saudi Arabia, OPEC's largest producer, started an unprecedented battle to squeeze Russia by slashing its crude selling prices over the weekend, with the biggest cut ever for some grades. This week it also announced plans to supply the market with 12.3 million b/d in April and increase its production capacity by 1 million b/d to 13 million b/d.

Iraq had no choice but to slash its selling prices for April to compete with Saudi Arabia as they battle it out in Asia, particularly China, which is Iraq's main oil customer. The two countries will also jostling for market share in India, where Iraq overtook Saudi Arabia as its top oil supplier in recent years.

"Saudi discounting appears designed to more directly challenge Russian in European markets, but Iraq will be collateral damage as like Saudi Arabia, it depends on Asian customers for the majority of its exports and is selling into a greatly softened market in China," Patrick Osgood, senior Iraq analyst at Control Risks, said.

Street discontent

For Iraq, the price war is taking place at the worst time in decades.

Political unrest since October, including demonstrations demanding political and economic change, has disrupted operations at some oil fields and refineries and led the government of Abdel Abdul Mahdi to resign in November.

"For the time being, risks are still there and the price shock will have a knock-on effect on government finance and government payrolls," Mohammad Darwazah, director of geopolitics and energy at Medley Global Advisors, said. "All will deepen the political crisis and discontent on the street."

Although President Barham Saleh in February appointed Mohammad Allawi to form a new government, Allawi withdrew his candidacy after he failed to win parliament's vote of confidence as political parties bickered over seats. On March 1, Saleh started 15 days of consultations to pick a new prime minister. There has been no progress reported so far.

"Iraqi political actors will be unwilling to give up their various footholds in the political system and in patronage and corruption streams even more so if this new oil price environment persists," Niamh McBurney, head of Verisk Maplecroft's Middle East and North Africa unit, said. "This is likely to lead to even longer political instability."

The political unrest is coupled with a tense security situation where US-led coalition troops in Iraq are often targeted, with the latest attack on Wednesday killing two American and one British soldier.

Leadership void

The lack of leadership was reflected in last week's OPEC+ meetings, which oil minister Thamer Ghadhban did not attend, sending his deputy instead. Now Ghadhban is holding talks with oil producers to halt the oil price crash. At the meetings in Vienna, Saudi Arabia was unable to convince Russia, which leads the 10 non-OPEC countries in the coalition, to sign on to additional output cuts because of the coronavirus.

"When it comes to OPEC internal dynamics, Baghdad does not have teeth, it does not bite," Ruba Husari, an Iraq oil expert, said.

Iraq also does not have the spare capacity that Saudi Arabia has to flood the market.

Iraq produced 4.5 million b/d of crude in February, according to official figures, and is thought to have a maximum production capacity of around 5 million b/d. However, it lacks sufficient pumping stations, export facilities especially in southern terminals and other infrastructure to boost its output even if it wanted to. It also has to take into account how much money it can give to international oil companies which get paid special fees for production from the fields they operate.

Vicious circle

The Iraqi oil ministry did not respond to S&P Global Platts questions about its plans for April. Ministry spokesperson Assem Jihad told the Iraqi News Agency this week that it wouldn't be "wise" to pump more crude given the supply glut.

"You need to increase production and exports to bring in more revenues but then you have to allocate part to those revenues to fields' operations: it's a vicious circle," Husari said. "It all depends how long the price war between Saudi Arabia and Russia will continue."

Lower oil revenue will exacerbate a tricky political situation, where the government has responded to street protests by hiring more public sector workers, inflating an already bloated public payroll that accounts for a big chunk of public spending.

"Assuming the price war drags out, Iraq is wholly unprepared," Ahmed Mehdi, research associate at Oxford Institute for Energy Studies, said. "The country lacks resilient fiscal buffers to withstand sustained low oil prices. Iraq was already set to enter a deficit this year. This will add to the chaos."