Disagreements
about Iraq’s oil production could derail the recently-announced OPEC deal.
OPEC surprised markets
by agreeing, in principle,
to limit the oil production of its members to a range between 32.5 and 33.0 million barrels per day (m b/d). The agreement is preliminary and its ratification will
be discussed on 30 November. Given that OPEC produced 33.5m b/d in August, according to the
International Energy Agency, the agreement would result in a cut of 0.5-1.0m
b/d, if implemented. Soon after the announcement, Iraq
expressed its dissatisfaction with the deal. It claimed that the OPEC’s
production numbers underestimate Iraq’s true output figures by nearly 300k b/d.
If Iraq is right, then the rest of OPEC will need to cut their production even
deeper to remain within the newly-agreed bounds.
Why is there a discrepancy
in production numbers? OPEC publishes two sets of data. The first is based on “direct
communication” relying on official sources from member countries. The second is
based on “secondary sources” compiled by independent companies and observers
watching the movement of tankers in and out of the world’s main terminals.
The two sets of
figures can be quite different. In the case of Iraq, production figures from
secondary sources were higher than those based on direct communication up to
the end of 2015. The average discrepancy was nearly 300k b/d. Curiously, however,
the relationship has flipped since the beginning of this year – Iraqi official numbers
are now reporting production that is almost 300k b/d higher than secondary
sources (see chart). It is not clear to me why this has happened.
Which number should
be trusted? Oil analysts have always considered the data based on secondary source
more reliable. They are less likely to be manipulated by governments to show,
for example, that their production is within an agreed quota or exaggerated in
order to have a room for growth in case of a production freeze agreement. Even
OPEC seems to trust secondary sources more. The headline OPEC production number
and the recently-announced production limits are both based on secondary sources.
What does this
statistical discrepancy imply for the OPEC deal? It leaves it open to three scenarios.
The first involves Iraq accepting secondary sources data as a basis for the allocation
of the overall production to individual countries. The second involves the rest
of OPEC acknowledging Iraq’s objection and cutting their production by 0.8-1.3m
b/d to remain within the agreed targets. The third scenario is that the production
limit in its current form will not be implemented as disagreement over the
numbers continue. As things stand, the third option seems the most likely
outcome.
