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.