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. Last Updated: 07/27/2016

Oil Deal Welcomed By Moscow

Russia on Tuesday welcomed Baghdad's deal with the United Nations on a partial resumption of oil exports as a step toward defusing UN-Iraqi tensions, even though it could depress market prices for oil, one of Russia's main exports.

"The signing ... is a breakthrough in the situation around Iraq," Foreign Ministry spokesman Grigory Karasin said of the accord, signed by the United Nations and Iraq in New York on Monday.

Russia hopes Iraq's return to oil markets will allow Baghdad to repay its huge debt to Moscow, estimated at $7 billion, but most Western states say it is too soon to lift all sanctions.

Russia and Iraq earlier this year signed a $10 billion agreement to revitalize Iraq's oil industry once sanctions are fully lifted. It includes provisions to repay Baghdad's debt to Moscow mainly through oil supplies.

Monday's accord allows Baghdad to sell $2 billion worth of oil over six months to buy food and medicine after nearly six years of UN sanctions imposed over Iraq's 1990 invasion of Kuwait.

"We assume this is a temporary measure which does not in itself replace the main task of a full de-blocking of the situation around Iraq," Karasin said.

In London, analysts said oil prices are likely to fall as much as $2 a barrel as Iraqi crude exports return at time of record high global output and an expected seasonal fall in demand.

A $2 drop would take Brent crude oil, the world benchmark grade, to the lower end of its price range since the Gulf War in 1991.

The UN-Iraq deal will put an extra 700,000 barrels per day of crude oil onto world markets at a time when demand is falling after a cold northern-hemisphere winter.

A UN spokeswoman said Monday that it may take several months before Iraqi oil actually hits the market.

Brent has fallen back 20 percent from the post-Gulf War high of $23.30 a barrel hit in April, to $18.35 on Tuesday.

"In the short term, the next few weeks, the oil market must register its recognition of the agreement by marking prices off further," said John Toalster, oil analyst with Societe Generale Strauss Turnbull in London.

Prices will drop "possibly by a couple of dollars towards the low end of the trading range, namely to around $15 to $16 a barrel," he added. Attention already is focused on how the Organization of Petroleum Exporting Countries responds to the challenge presented by one of its key members, the holder of the largest oil reserves in the world after Saudi Arabia.

Early reaction by OPEC's leading producers, Saudi Arabia and Iran, has been relaxed. They see the market easily absorbing the extra oil. "The real milestone will be the next OPEC conference starting on June 5," Toalster said.

Independent observers estimate OPEC is already producing more than 26 million barrels per day despite its self-imposed ceiling of 24.52 million.

With Iraq exporting, this could push output toward 27 million barrels during the critical northern-hemisphere summer months when demand is low.

"There is a need for OPEC restraint in the second half of the year," Kleinwort Benson oil analyst Mehdi Varhzi said.

He saw the chance of Brent sinking to $15 a barrel "at some point" if OPEC output was allowed to reach 27 million barrels per day in the second half of this year.