According to an analysis by the Economist Intelligence Unit (EIU), Iraq’s decision to halt oil exports adds a new element of risk to current oil price forecast, but the authors said they continue to believe that crude prices will decline over the next few months.
The EIU based its analysis on the fact that a mounting production surplus in world markets over the last six months, which has led to rising stocks, is capable of restraining prices, as is a commitment by OPEC - and Saudi Arabia, in particular - to compensate for the Iraqi shortfall should prices spike.
However, If Iraq's production cuts last for more than a month or two, pressure in the market could build; the cutbacks in any case will make the market more vulnerable to an unexpected rise in demand, says the report.
Iraq is halting exports as a protest against the recent UN decision to extend the current sanctions regime for one month instead of the usual six months. The UN, at the request of the US and the UK, is attempting to transform the current blanket sanctions regime into so- called "smart sanctions" that would allegedly target the Iraqi government rather than its people. The short, one month extension of the current regime is meant to give the US and UK time to shape the new sanctions strategy. Iraq is, however, opposed to the smart sanctions, which could potentially close off its lucrative oil smuggling operations. (Iraq is currently smuggling oil into the market through Syria, Turkey, Jordan and other Gulf states), says the analysis.
Although the re-emergence of violence in the Middle East has also been placing upwards pressure on prices, the Gulf oil producers so far have not gone much further than to lend verbal/diplomatic support to the Palestinians, and it is unlikely that the current unrest would broaden into a wider regional conflict that could severely impact oil prices, according to the authors.
“Iraq's decision to withhold exports does, however, add a new risk to our forecast. Without Iraqi oil in the market, the current surplus is greatly eroded. It is difficult, at this point, to say how long Iraq will withhold production. The UN will meet again in early July to consider the revised sanctions plan; if a new regime not to Iraq's liking is put into effect, Baghdad may continue to withhold oil from the market. OPEC, however, is also scheduled to meet at the same time, and is likely to counter continued Iraqi production curbs by raising output if world oil prices move substantially higher. OPEC, and Saudi Arabia in particular, have a strong interest in a stable oil market: they would prefer to keep the price of oil between $22 and $28/barrel, ideally around $25.
“We do not believe, however, that Iraq will persist with its production curbs. The government has halted exports before for short periods, but has usually found an excuse to return to the market. The UN, in any case, is unlikely to agree on a new sanctions regime by early July; there is no consensus on what shape new sanctions might take, and further delays are possible. This may clear the way for Iraq to re-enter the market, at least for a while, restoring the surplus,” concluded the report – Albawaba.com
© 2001 Al Bawaba (www.albawaba.com)
