Record High February Exports From Iraq Cause Further Market Downturns

Wednesday January 11, 2017

Despite data showing that Iraq is preparing to ship a record 3.64 million barrels per day (bpd) of crude in February, Jabbar Al-Luaibi, the country's oil minister, insists that it will comply with cuts agreed to under the Organization of the Petroleum Exporting Countries' (OPEC) reduction plan, currently being enacted.

A loading program obtained by Bloomberg reveals the 3.64 million bpd volume that will be shipped from ports in Iraq's southern Basra province exceeds its December average of 3.51 million bpd, which was a record high.

Iraq promised to slash production by 210,000 bpd from October levels under the OPEC agreement ratified on November 30, and Al-Luaibi insists this volume will be met; he also stated that his country has already reduced production by 160,000 bpd.

But the market isn't buying the claims: oil fell two percent on Tuesday, with Brent down $1.26 per barrel to $53.64 and West Texas Intermediate settling down $1.14 to $50.82, the latter being the weakest daily closing since December 7.

This follows both crude contracts falling around four percent on Monday, again due to concerns over Iraq.

In fact, any optimism generated by the past week's news that several OPEC members and non-members are holding true to their reduction promises (news that is so far based on claims rather than hard data) seems to have evaporated: Tim Evans, energy futures specialist at Citigroup said in a note, "Fresh reports that non-OPEC producers Russia and Kazakhstan have reduced output have produced little price reaction, with the failure to rally on bullish news suggesting that the market is overbought and vulnerable to a further downward correction."

Compounding market worries is U.S. drillers increasing their rig count by four to 529 last week, according to Baker Hughes, as well as the U.S. Energy Information Administration revising its 2017 U.S. crude output forecast to a 110,000 bpd growth, compared with last month's prediction of an 80,000 bpd year-over-year decline.

All of this has caused to remark that with speculators having built up such a large bullish bet on oil, "there are very few short positions left.

"That suggests two things, both of which are bearish for oil: there is not a lot of money left to go long, lowering the chances of further prices gains; and the potential for a correction in prices is very high at this point."

Supposedly good news from Russia earlier this week did nothing to bolster the market: it claimed to have reduced production by about 100,000 bpd, or one third of what it pledged to OPEC; still, Essam Al-Marzouq, oil minister for Kuwait, took the opportunity to state that he expects a "big commitment" by OPEC and non-OPEC members to contribute to the reductions.