Iraqi Oil in South Keeping Dollar Bond Slump ContainedRobert Tuttle
The slide in Iraq’s dollar bond since June, when Islamic militants overran much of the country’s north, is being contained by rising oil revenue as exports increase in the south.
The yield on Iraq’s January 2028 dollar security has jumped 114 basis points to 7.43 percent since tumbling to a 16-month low on June 9, according to data compiled by Bloomberg. The rate remains below this year’s high of 7.74 percent in February, and compares with a 30 basis-point increase in the JPMorgan Chase & Co. Emerging Markets Global Sovereign Bond Yield Index.
While insurgents from the Islamic State, an al-Qaeda offshoot, have seized oil fields and taken control of the country’s largest dam as they threaten Prime Minister Nouri Al-Maliki’s government, most of the nation’s production is flowing without interruption in the oil-rich south. Crude sales rose 5 percent last month to 2.44 million barrels a day.
“The heart of Iraq’s oil industry -- and the economic engine of the country -- is located in the south, far removed from the Islamic State’s latest military adventure,” Geoffrey Batt, managing director of the $110 million Euphrates Iraq Fund, said yesterday in an e-mail from New York. “In July, Iraq earned $7.8 billion from southern oil exports, meaning one month’s exports could buy the entire bond issue roughly three times over.”
The advance of Islamic State fighters, who captured the northern city of Mosul in June, poses the biggest threat to Iraq’s government since the 2003 U.S.-led invasion that toppled former leader Saddam Hussein. Insurgents seized the Mosul dam, the country’s largest, local officials and an employee on site said today. Control of dams could enable the jihadist group to flood areas near Baghdad and Mosul. Militants took two oil fields earlier this month with a combined output of 30,000 barrels a day, state-run Northern Oil Co. said Aug. 3.
Shares on the Iraq Stock Exchange slid 2.7 percent today in Baghdad, the lowest close since at least 2009.
“Bond prices in Iraq have reacted to deteriorating security conditions and complex political considerations,” Mohieddine Kronfol, chief investment officer for global sukuk and Middle East and North Africa fixed-income at Franklin Templeton Investments ME, said in an e-mail from Dubai. “The markets have not yet priced in impaired exports of oil or an unraveling of the sovereign which, in our view, is a reasonable current assessment.”
Iraq exports almost all its oil, excluding crude produced in the semi-autonomous Kurdish region, by tanker through the Persian Gulf, far from where the insurgents have captured territory for their self-declared caliphate.
Genel Energy Plc, the largest oil producer in the Kurdish enclave, is confident the northern region will maintain unimpeded exports of its own, and the company plans to ship 20,000 barrels a day by pipeline in the second half of the year, Julian Metherell, its chief financial officer, said in an Aug. 5 interview.
Iraq pumped 3 million barrels a day of crude in July, second to Saudi Arabia among the Organization of Petroleum Exporting Countries, according to data compiled by Bloomberg. It holds the world’s fifth-largest oil reserves, according to the U.S. Energy Information Administration. The International Monetary Fund forecasts the Iraqi economy will expand 5.9 percent this year, faster than any other Middle Eastern country.
“To some extent, investors think that politically you still have a country that is Westward-leaning and will continue orthodox policies,” Stuart Culverhouse, chief economist at investment bank Exotix, said by phone from London. “We are not seeing a repudiation of the bonds because of the difficult situation.”