Iraq’s crude exports plummeted in June, reflecting improved compliance, as overall OPEC+ seaborne oil exports continued to decline further, according to vessel tracking data. Concurrently, Basrah exports to India, a major oil market for Iraq, rebounded following their fall in April and May, as New Delhi eased the pandemic-induced lockdown measures.
A slow recovery in global oil prices, meanwhile, gave Iraq’s federal oil revenues a slight lift, but far below the finances the country needs. However, despite the financial losses from the painful oil cuts, improved compliance, even if brief, is better than pressing on with overproduction and coming under pressure from OPEC rivals when prices recover further.
The first part below examines Iraq’s crude oil flow to its Indian client amid a gradual recovery in oil consumption. The second, looks at what the country has done so far to improve its OPEC+ compliance as it juggles its own economic and budgetary problems.
Basrah Flow to India Amid Gradual Consumption Recovery
India, the world’s third largest oil consumer, is where some oil suppliers saw a short-lived shift in their market shares over the past few months due to suppressed oil demand. In the case of Iraq, Basrah exports rebounded to around 900,000 bpd after plunging in May to their lowest monthly level since mid-2018, figures from Kpler, a data intelligence firm, show. This increase occurred as India’s oil consumption began a gradual recovery.
According to Homayoun Falakshahi, a senior analyst at Kpler, global oil exports to India “were up more than 500,000 bpd in the past weeks compared to May,” but this is still below the pre-COVID 19 levels. Data from TankerTrackers.com, a company that tracks crude exports and storage, also shows a rebound in Iraqi exports to the Indian market where Basrah supplies are seen strong again.
In April and May, India filled it strategic reserves amid a collapse in oil prices, “and sought more Saudi and UAE oil because they are partners in India’s strategic petroleum reserves program” said a senior official at the Indian Ministry of Petroleum and Natural Gas. But this did not mean that Iraq was no longer the top supplier, he added in a private conversation last month. In April, Saudi exports to India hit a record high, rising to over 1 million bpd when Riyadh ramped up output, but exports last month slumped below 600,000 bpd, Kpler data shows, as Saudi Arabia made extra cuts.
OPEC+ Compliance and Complex Cuts
Iraq’s federal crude exports fell by around 12 percent—from about 3.2 million bpd in May to 2.8 million bpd last month, as the country deepened its cuts. Exports from northern Iraq, via the Turkish port of Ceyhan, dropped by about 11 percent compared to exports in May, according to TankerTrackers.com. Meanwhile, overall Opec+ seaborne exports fell by an extra 2.3 million bpd in June.
Last week, Kpler estimated that Iraq’s compliance climbed from 27 percent to 63 percent in June, noting that Baghdad had reached agreements with International Oil Companies (IOCs) to curb oil production at Iraq’s largest fields such as Rumaila, Zubair, and West Qurna. “This is a major difference compared to previous action from Iraq,” Kpler said, in reference to past curtailments that occurred mostly at state-operated oilfields. Curbing oil production at IOC-operated oilfields subjects Baghdad to heavy compensation fees —a difficulty Iraq faced during the oil price shock of 2014.
Iraq could also implement in the next few months extra reductions to compensate for the months of overproduction. Opec+ has agreed to a combined 9.7 million bpd of supply reductions in May-July. Referring to the deep cuts that are meant to shore up prices, the Russian Energy Minister, Alexander Novak, said last week that as of August 1 “there will be partial recovery.”
Daunting Budgetary Challenges
As Iraq moves closer towards compliance, it drags behind financial challenges that have accumulated throughout the years.
More than 90 percent of Baghdad’s state budget comes from oil sales, and the government needs an estimated $4.2 billion each month for public salaries and pensions. Spending on these salaries and pensions made up 47 percent of total expenditures in 2019 . With the current oil prices, federal oil revenues have slumped below $4 billion per month (see chart below). These figures reflect a daunting task for the government in Baghdad. The cabinet is now forced to navigate a global oil crisis while trying to reform an economy tied to a political system that has been resistant to change.
“Oil price vulnerabilities, as measured by external or fiscal break-even point across the board, are deteriorating or worsening for most of the MENA oil exporters, but in particular for Iraq given the major increase in fiscal spending in 2019 that is driving much of the fiscal deficit this year,” said Alia Moubayed, Managing Director and Chief Economist at Jefferies International, in a presentation on June 22 at the Iraq Finance Expo (IFEX), the first digital conference for Iraq.
“For Iraq, we are expecting gross external financing needs in 2020-21 to be $40 billion, the fiscal deficit will exceed 20 percent of GDP, public debt will likely double from around 47 percent in 2019 to exceed 80 percent of GDP by the end of this year,” Moubayed added in her presentation.
The new Finance Minister Ali Allawi is now in charge of making the long-overdue and urgent fiscal adjustments. Allawi has explained on different occasions the reform program his cabinet is embarking on while acknowledging the challenges, which require a tough balancing act, according to Iraqi economic analysts and researchers.
“On the one hand, there is the issue of oil revenues that is not in the control of the state, and there is very little revenue other than that. On the other hand, there’s the high public payroll which is impossible to cut,” said Ahmed Tabaqchali, a financial analyst and senior fellow at the Sulaimani-based Institute of Regional and International Studies (IRIS). There are roughly 3.9 million government employees, 2.4 million pensioners, and around 600,000 others who collect social security, according to Salem Chalabi, an adviser to Iraqi Prime Minister Mustafa al-Kadhimi, who was speaking during a virtual panel at IFEX on June 23. Just last month, the parliament voted down salary cuts.
Despite these challenges, Iraq made progress on its OPEC+ compliance in June, and as prices gradually rise, it remains to be seen how Iraq will proceed. As Rystad Energy recently said, even if further measures for additional curbs are performed, “the question that remains at large is – for how long?”