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3 Potential OPEC Deal Killers

Authored by Zainab Calcuttawala via OilPrice.com,

The Middle East isn’t yet ready to agree on the future of OPEC’s output reduction deal as the bloc’s November 30 summit approaches, during which the cartel is set to decide on the depth and length of the cuts one year from their initial approval.

Here are the three key geopolitical issues wreaking havoc on the region’s ability to collectively raise the price of oil.

1. The Trump Administration’s Ongoing Iran Nuclear Deal Drama

From the day that Donald Trump declared he would run for president, he made it clear that he is firmly against the current deal with Tehran to reintegrate Iran’s economy into the international community in exchange for a smaller and monitored nuclear energy program. He believes the plan gives up too much leverage on the American side for the furthering of U.S. foreign policy objectives in the Middle East.

Earlier this month, Trump officially decertified the nuclear deal, which doesn’t do much in the way of dismantling the agreement, but does give Congress leeway to authorize further sanctions against Iran.

Tehran’s oil and gas industry needs global economic integration in order to fund social services and ensure a prosperous future for the Iranian people. Though Secretary of State John Kerry made his rounds reassuring European nations that their firms would not be hit by American sanctions by investing in Iran’s fossil fuel industry, Kerry’s replacement in the Trump administration has made no such promises.

What Secretary of State Rex Tillerson did do is issue a statement supporting Iran’s technical compliance to the deal, despite the president’s explicit decertification of it.

The uncertainty surrounding the U.S. sanctions on Iran leads to uncertainty regarding OPEC’s third largest oil producer’s ability to contribute to or maintain oil output. Tehran’s participation in the oil game has been contingent upon the success of the nuclear deal since January 2016. New sanctions from a Republican congress could undo much of the progress made by engaging the economic pariah.

2. Iraq’s Intense Struggle with Kurdistan

The Kurdistan independence referendum last month caused Baghdad to take over key oil fields formerly controlled by the Kurdistan Regional Government (KRG). A fraction of former output (half, or less than half, by most measures) is currently flowing through a pipeline in the area due to a deal between the Iraqi government and the Kurdish KAR group.

Last weekend, Iraqi authorities said they increased oil exports from the southern Basra region by 200,000 barrels per day to make up for a shortfall from the northern Kirkuk fields. But this doesn’t promise future output rebuttals if the KRG or its Peshmerga decide to strike back to regain its oil might. A significant loss in output from OPEC’s No. 2 producer could cause an unexpected spike in oil prices, which is what Saudi Arabia, the bloc’s leader, craves.

3. A Gulf Blockade Entering its Sixth Month

Despite its standing as top exporter of liquefied natural gas, Qatar is not a significant oil producer. The geopolitical impact of the Gulf’s economic blockade against Doha, however, could have significant geopolitical consequences as it enters into its sixth month with no end in sight. Instead of limiting its ties to Iran, Qatar has spent its political capital strengthening ties with the Shi’ite nation, which rivals Saudi Arabia politically and economically. Escalating tensions between the Gulf and Qatar will further increase the angst between Iran and Saudi Arabia, impacting the future of Iran as a political player and as a major oil producer.

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This trio of major regional disputes plaguing the Middle East heavily involve the top three oil producers in the bloc. Iran has been in economic recovery mode since sanctions were lifted back in January, while Iraq’s stability over the course of 2016 and most of 2017 had allowed production to rise steadily.

With the trajectory of future output for the neighboring nations unclear, it remains to be seen whether the bloc will find it necessary to tighten quotas. After all, if the production cannot be summoned due to tangential political issues, there may be no need to limit it directly.