Iraq cancels crude loading, defers two more to help OPEC+ compliance

Iraq has cancelled a 1 million-barrel spot crude sale and will defer two more "in the coming days" in an effort to meet its OPEC+ compensation targets after overproducing its quota in the first half of the year, a senior official with state marketer SOMO said Aug. 29.

The official did not stipulate which grades would be included in the canceled and deferred shipments, which total 3 million barrels.

The export cuts mark Iraq's most serious effort to date to bring crude production in line with its current OPEC+ quota, and will be supplemented by lower refinery runs, less output in the semi-autonomous Kurdistan region and reduced crude burn in the power sector, totaling some 280,000 b/d, the senior official said in a briefing with independent secondary sources used by the group to monitor member compliance. Questions remain, however, over Baghdad's capacity to constrain Kurdish output.

The reductions come as OPEC+ is battling to shore up the oil market amid sluggish Chinese demand and high production in non-allied producers in the Americas, as the alliance looks to gradually unwind 2.2 million b/d of voluntary cuts from October, subject to market conditions.

Platts, part of S&P Global Commodity Insights, last assessed Dated Brent at $81.07/b on Aug. 28, having fallen from just under $90/b in early July, ratcheting up pressure on the non-compliers. Iraq is the group's biggest overproducer.

'Tremendous decline'

The official said Iraq would cut exports by 130,000 b/d, thanks largely to the cancelled and deferred cargoes, taking average exports below 3.4 million b/d in August, and to 3.3 million b/d in September.

The shipment changes could not be immediately confirmed, but the SOMO official said exports had fallen gradually from 3.45 million b/d on Aug. 25 to 3.1 million b/d on Aug. 28. Nevertheless, OPEC quotas are based not on exports, but wellhead production.

Export cuts will be matched by a "tremendous decline in local consumption", from 550,000 b/d to 500,000 b/d, while crude burn is also expected to fall as temperatures ease off their summer highs.

Meanwhile, output in the Kurdistan region -- which SOMO estimates at a maximum of 150,000 b/d -- will fall to 46,000 b/d, the official said, with any additional volumes requiring Erbil to pay the federal government. That will be enforced, the official added, through cuts to the budget Baghdad pays to the region, which includes money for paying salaries.

The KRG could not be reached for comment, while the Association of the Petroleum Industry of Kurdistan, a trade group representing oil companies in the region, did not immediately respond to requests for comment. As of March, Baghdad owed the Kurdistan region more than $7 billion in unpaid dues, according to a statement from the regional government at the time.

Commodity Insights estimates KRG crude production at 250,000 b/d, significantly higher than SOMO's estimates.

Compensation plans

The planned reductions -- which are designed to take September output to 3.91 million b/d -- are an effort by Iraq to comply with its latest OPEC compensation plan, submitted in August.

The country overproduced its quota by hundreds of thousands of barrels per day between January and August, including by 251,000 b/d in July, according to an assessment by seven secondary sources, which includes the Platts OPEC Survey from Commodity Insights.

The country previously said it would hold exports at 3.3 million b/d in July, but they instead reached 3.486 million b/d, according to SOMO data. Total Iraqi oil output in July rose by 53,000 b/d month on month, according to estimates from secondary sources.

"There will be some skepticism in the market until export data shows a drop -- and that it is a sustained drop," said Jim Burkhard, Commodity Insights' vice president of oil markets, energy and mobility. "The market will need time to assess. Exports from the KRG remain a wildcard as well."

The Iraqi official confirmed that a third compensation plan in as many months would be submitted to OPEC in September, with August output likely to exceed its quota.

Kazakhstan maintenance

Iraq is not alone in overproducing. Russia and Kazakhstan have also submitted compensation plans but remain over-quota as of July.

On Aug. 28, a senior Kazakh energy ministry official said it would improve compliance due to maintenance at major fields through November. Tengiz field maintenance began on Aug. 1 and should end Sept. 10, taking around 130,000 b/d off the market, the official said.

Meanwhile, maintenance will be carried out at the Kashagan field from Oct. 3 to Nov. 11, provisionally, taking around 400,000 b/d off the market.

Kazakhstan produced 1.545 million b/d in July, according to assessments by secondary sources, well above its July quota of 1.45 million b/d.

Meanwhile Russia, which has overproduced since April, said on Aug. 9 that output in August and September would remedy July overproduction of 67,000 b/d. It has yet to release a detailed compensation plan.

The OPEC+ Joint Ministerial Monitoring Committee, co-chaired by Saudi Arabia and Russia and tasked with overseeing the group's production accord, is next due to convene Oct. 2. A full OPEC+ ministerial meeting is scheduled for Dec. 1 in Vienna. The group can call extraordinary meetings if it considers market conditions require policy changes.