Should old acquaintance be forgot, and never brought to mind? Not when it comes to oil. Once again it appears that oil is getting ready to ring in the New Year with an invigorated bull run. Happy Bull Year!
In past years the New Year bull was inspired by concerns about Iran or Russia cutting off gas supplies to its neighbors for political reasons, or a price dispute, depending on your point of view. This year the part of the world where oil has stopped flowing is in the Kurdish areas of Iraq.
The Kurds sit on some of the richest oil reserves in Iraq and is part of Iraq that is self-ruled. Their major customer is Turkey, which fears that if the Kurds are allowed to form a real country, they would be a threat to Turkey. In the aftermath of the Iraq war, it was agreed that the Kurds would not get their own country but could be semi-autonomous and rule themselves as long as they realized that at the end of the day they were still part of Iraq.
It was agreed that the Kurds could cut independent deals as long as the money went to the Iraqi government and they would split the revenue. Yet over the last four days, the Kurds have cut oil flow because they claim that Iraq owes them more money for the oil that they have pumped. The Kurdish Energy Minister says that they have cut output by 100,000 barrels per day and may cut even more unless Iraq pays up what they say is owed. The San Francisco Chronicle reported that since the 2003 U.S.-led invasion, the Kurds have unilaterally struck more than 50 deals with foreign oil companies, even though Baghdad says they have no right to do so. In 2011 the two sides reached a tentative deal by which the Kurds send the oil to Baghdad which then sells it, and pays 50% of the revenues to the developers. In April, the Kurds halted exports, charging that Baghdad had failed to pay $1.5 billion they say they are owed. Four months later the Kurds agreed to restart exports as a goodwill gesture. That allowed the two sides to reach a new agreement under which Baghdad would pay $848 million to the companies in September.
Of course the larger issue for the energy market is that this dispute could escalate into something much larger. It is clear that the Kurds want their independence and the money that they are earning from some of Iraq’s most productive fields is giving them a sense of power and influence. If they decide to try to wield that power and try to declare independence, the situation could deteriorate quite quickly.
Iraq has other problems than just the pay dispute with the Kurds. Dow Jones reports that Russia’s Lukoil Holdings will cut its production in Iraq by 30% after the Iraqi government decided to limit output in order to prop up prices, the president of Lukoil Overseas Holding Ltd. said in an interview. Andrey Kuzyaev told state television Rossiya-24 on Wednesday that Lukoil now estimates that output at the West Qurna-2 oil field will reach 1.2 million barrels per day instead of 1.8 million barrels predicted in an initial estimate. The revision could prolong the production period to 19 years from 12-13 years projected earlier. Lukoil, Russia's second biggest oil producer revised its plans after the Iraqi government decided to cut the country's production to 9 million barrels a day from 12 million barrels.
Part of the move is seasonal as well. As I have written before, the oil market was putting in a rounded bottom and establishing the lower end of the trading range and that the market should go to the mid-$90s. It looks like we are right on track.
Of course the market still will have to deal with the fiscal cliff charade down in Washington. The oil market found comfort in the fact that Obama canceled his Hawaiian vacation early. Why bother leaving paradise to come back to Washington unless you thought you could solve the cliff problem.