Newsletter – July 2021

Economic revival hinges on the country’s energy sector, where several high-profile developments have taken place in recent weeks. Oil exports in June decreased to 3.318 Mb/d, yet revenues increased to US$ 6.163 B, up from US$ 5.88 B in May, with the average price of Iraqi crude standing at US$ 70.778/bbl. The 2021 Budget, first presented in December, was finally approved on March 31, preserving the country’s recent currency devaluation (~23% to the US dollar), and projecting a spending budget of US$ 89.7 B and a dinar-denominated deficit equivalent to US$ 19.5 B. Iraq expects to earn oil revenues of US$ 47.5 B[1] based on an oil price of US$ 45/b and ~3.5 Mb/d of exports, which in dinars should significantly improve state earnings. 3.5 Mb/d is a significant jump from Iraq’s current ~3 Mb/d exports, which it is hoping to realize from new production from state-run fields that have had to keep production shut-in due to OPEC+ constraints. Oil prices are also likely to be higher, as Brent crude has averaged almost $66 per barrel so far this year, with Iraqi export pricing to Asia about $0.50 below that. Under the revised OPEC+ deal of July 2021, the group’s production will increase by 400 kb/d each month, of which Iraq’s share would be 44 kb/d, up to April 2022. After that, production will continue to increase by 400 kb/d each month to the end of 2022 but with a slightly different allocation between members, but Iraq’s share remains at about 44 kb/d. If oil prices remain at current levels, Iraq would therefore earn almost an additional $100 million progressively each month. This would raise Iraq’s quota to 4.412 Mb/d by end-April 2022 and 4.764 Mb/d by end-2022, implying that the country would be able to reach its actual production capacity by Q4 2022. This has caused Fitch Ratings to revise the Outlook on Iraq’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at ‘B-‘.

OPEC forecasts 2021 world oil demand to increase by 6 Mb/d, unchanged from last month’s assessment, reflecting the positive economic impact on oil demand during H2 2021, encouraged by accelerated vaccination campaigns boosting transportation fuels’ outlook, leading to stronger economic indicators. Non-OECD demand will continue improving due to positive momentum from Q4 2020 carrying forward in China with growth projected to continue increasing in H2 2021, due to a combination of factors, including successful containment measures especially in emerging and developing countries, and the encouraging outcome of fiscal and monetary stimulus programmes. Oil demand might still be impacted by new lockdowns in Asia (such as in India and Singapore), a patchy vaccination rollout in Middle Eastern countries outside the GCC, and weaker economic momentum in Iran, Iraq, and Oman. While a sanctions-relief deal appears on the cards for Iran, this now seems likely to occur only after the inauguration of new president Ebrahim Raisi on 5th August. It would therefore be unlikely that substantial production and export levels would be realized before Q4 this year.

Overall Middle East demand increased by 321 kb/d in June over May levels, as lifted restrictions along with improvements in mobility added to a robust recovery that could pick up pace further in H2 2021. Demand for oil products in Saudi Arabia has posted healthy gains in recent months, making up nearly 96% of lost demand from May 2020, mainly due to growing mobility as the country charges ahead with its vaccination campaign. PMIs have stabilized, even though economic activity has not yet reached pre-CoVid-19 levels. This has informed some noteworthy deals in the energy sector in recent weeks, summarized in the following table.

Top Energy Deals in the Region

[1] While not yet disclosed by the Iraqi Parliament, the revenues earned seemed to be calculated by excluding the first two months of 2021, for the remainder of the year

[2] the firm had signed an MoU with Eni to combine both companies’ assets in Angola and Algeria into new jointly-owned companies to save on costs and boost growth

[3] Asseifiya, Ettouk, Al Ghallan, and Umm Al Anbar in the Upper Zakum field and Al Qatia and Bu Sikeen in the SARB field.

[4] Baker Hughes International Rig Count

Middle East oil drilling has still not recovered from the sharp drop induced by the pandemic and the related OPEC+ production cuts. However, it is likely to start expanding as quotas increase and production growth plans in the UAE and Iraq get underway.

Gas drilling is starting to show a moderate recovery, supported by the beginning of Qatar’s LNG expansion projects.

Note: Iraqi gas rigs are not reported by Baker Hughes, likely because Iraq reports gas rig figures clubbed with oil rigs and/or lack of response from contractors (drilling for non-associated gas is at minimal levels compared to oil, although it should pick up as Sinopec’s development of Mansuriyah and the Pearl Petroleum consortium’s expansion of Khor Mor move forward).