The next thing that will happen in Iraq if protesters’ demands aren’t met is this: They will target oil facilities–the only thing that will force any major change, and indeed, the root cause of protests that have gone beyond anything Iraq has ever seen.
It is a possible scenario that should be on every oil trader’s radar, and has the potential to move oil prices more than President Trump, and more than OPEC—if markets interpret it correctly.
Last Friday, Iraqi Prime Minister Adel Abdel Mahdi resigned. The Iranians had attempted to keep this from happening–even though Mahdi wasn’t pro-Iranian–because the fragility of the Iraqi government threatens Tehran’s indirect hold on power.
The move will embolden protesters even further; Mahdi’s resignation was not enough. After all, some 400 protesters have been killed since October 25th. It will take more than Mahdi’s resignation to end this.
This is a countrywide grievance that transcends sectarian differences, even if the majority of the protests are in Shi’ite-dominated provinces, while Sunnis provinces are still shell-shocked from the conflict with ISIS.
On the surface, it’s about a lack of basic services in an oil-rich country that can’t provide regular electricity or drinking water to its people. Below the surface, it’s about massive corruption and a broken system that has led to mass unemployment among the youth and a shattered education and healthcare system.
Iranian influence had kept things from leading to Mahdi’s resignation up until Friday, when the voice of Iraq’s Grand Ayatollah Ali al-Sistani finally emerged on the side of the protesters after being criticized by Shi’ites for failing to speak up. One word from Sistani brought Mahdi down, and one word from Sistani prompted the Supreme Judicial Council of Iraq to label the repression of protesters as a “crime”.
And Mahdi’s resignation is the only thing that is delaying a major armed conflict between protesters and security forces in Southern Iraq, where all the oil lies.
Still, it will not be enough to appease the protesters, even though it has briefly delayed an advance on the oil-rich south. That it’s not enough is already evident in calls for the next prime minister to resign before he has even been named.
What’s at stake if protesters take on Basra? Five million barrels per day of oil, 12% of the world’s proven oil reserves, and a ton of investment money—foreign investment money.
China is the biggest buyer of Iraqi crude oil, and one of the biggest investors in the Iraqi oil and gas industry. PetroChina and China National Petroleum Corporation (CNPC) have massive investments here, including PetroChina’s 25% stake in the giant West Qurna 1 project, which is majority-owned by Exxon. CNPC also produces some 2 million bpd from its Rumaila and Halfaya oilfields in southern Iraq.
In September, Iraq’s Basra Oil Company signed a contract with the Chinese to develop and complete 80 oil wells in the giant Majnoon field, also in Basra.
With China hoping to boost crude oil sales from Iraq by more than two-thirds to 850,000 bpd by the end of this year, which is already upon us, you can bet China is watching the situation in Iraq with trepidation.
Russia, too, has invested in Iraq’s energy industry–more than $10 billion over the past nine years, according to Forbes. That includes Lukoil’s West Qurna-2 development in Basra, which accounts for about 9% of Iraq’s total crude oil production. Elsewhere in Iraq, it includes Gazprom’s investments in central Iraq and the northern Kurdistan region, as well as Stroytransgaz’s contracts in Anbar province.
And it’s even possible that Exxon had an inkling as to which way the Iraqi winds were blowing this summer when things uncertainties arose in relation to the oil giant’s participation in the $53-billion project to boost Iraq’s oil output at its southern fields.
The next question is this: Would protesters dare to make a move on Iraqi oil?
All indications are that they would, and they already have dabbled in this. They’ve blocked roads leading to five oil fields in Basra, and anger of Baghdad over where all that oil money is going has spread–irreversibly–to the oil province.
They’ve been bold enough to burn down an Iranian consulate and even attack a pro-Iranian security building, knowing full well that the backlash would be extremely violent.
Iraq is running out of time, and as the political elite gather today to discuss what happens next, and who will be put forward as the next prime minister, Iran is there in the form of a key Revolutionary Guards commander by the name of Major General Qassem Soleimani who will push Tehran’s choice to replace Mahdi.
This is all happening while protests continue in key Shi’ite religious cities in Iraq–Najaf and Karbala–where security forces were firing live rounds on demonstrators overnight.
And the market, in the meantime, has their eye on a different ball, and is preoccupied with President Trump’s proclamations of the stalling trade deal (sending oil prices down) and OPEC’s proclamations of deeper or longer production cuts (sending oil prices up).
Mahdi’s resignation may have helped to prop up oil prices a bit, but the market has never been a geopolitical genius, as evidenced by the sheep-like following of non-news emanating from OPEC members about what may come to pass.
What traders should be watching is the very real developments in Iraq that may mean a significant supply disruption—what every trader long on oil has been waiting for for over a year.
The Iraqi government has only two alternatives: full-on repression, which means a bloodbath far beyond what we have already seen, or major reform of which it is clearly not capable, particularly with Iranian influence.
What the market should be responding to is the clear and present danger facing 12% of the world’s known oil reserve—even as things appear to be—on the surface—calming in Iraq.
By Anes Alic for Oilprice.com