• Iraq informed several Asian customers it will not meet contractual demand next month
  • OPEC said it expects demand next month to drop 3 million barrels a day
  • Oil currently is trading at 40% of pre-coronavirus pandemic levels

Iraq, OPEC’s second biggest oil-producer, reportedly plans to cut the amount of oil it will send to Asian buyers next month as part of the effort to reduce the worldwide oil glut. The news came as the Organization of Petroleum Exporting Countries issued a bleak projection on demand for the rest of the year.

Bloomberg reported the state-owned oil marketer SOMO told at least three customers they will receive less oil than called for in their contracts, with one of the customers reporting the cut could be as high as 30%. Iraq’s decision follows an output target increase of 200,000 barrels a day for April.

The oil cartel predicted the second quarter would see demand drop by about 3 million barrels a day to 16.77 million barrels this month and next as coronavirus lockdowns continue to wreak havoc on the world economy.

"The revision is based on production shut-ins or curtailment plans announced by companies, including the majors, particularly in North America," OPEC said.

The situation sent prices into negative territory on the April contract as producers pumped more than 30 million barrels a day in a bid to grab marketshare. Prices have since recovered modestly, with crude trading around the $25 level early Wednesday afternoon. Prices still are 40% below pre-pandemic levels.

The drop in demand and prices has decimated the U.S. shale oil industry and resulted in a scramble to find storage space for excess petroleum.

Saudi Arabia, the United Arab Emirates and Kuwait earlier agreed to cut output, with the Saudis planning to cut 1 million barrels a day, reducing production to 2002 levels. Iraq, seen as OPEC’s least cooperative member, balked at production cuts announced earlier.

Bloomberg said OPEC members may be taking the situation more seriously now. The group, along with non-OPEC members Russia and Kazakhstan, said they would cut output by 9.7 million barrels a day in both May and June.

Iraq was expected to cut June production by 1 million barrels from May levels but reportedly was still undecided on which oilfields to close.

Saudi Arabia and non-OPEC member Russia issued a joint statement saying oil demand is expected to improve as economies move out of lockdown.

The cartel and its non-member partners are scheduled to meet June 9-10 to discuss strategy for the second half of the year.