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. Last Updated: 07/27/2016

Iraq Standoff Could Be A Catch-22 for Investors

Russian oil majors could gain from a short-term spike in world oil prices in the event of military action in Iraq but could in turn lose the opportunity to trade Iraqi oil under the United Nations' oil-for-food deal.

Analysts said they expect that conflict in Iraq would temporarily jolt world oil prices from a four-month slump that has seen prices drop by 30 percent. Any increase in crude prices would bring significant relief to the bottom line of Russian companies, which have suffered from plummeting prices more than their foreign counterparts, analysts said.

London oil traders, however, seemed on Tuesday to dismiss the likelihood of war, sending benchmark Brent North Sea crude prices to a four-year low of $14.48 per barrel. Increased production from OPEC nations and declining demand from financially troubled Asia have produced a glut on the market since early October, when oil fetched about $21 per barrel.

"Any sort of military action would lead to a short-term rise," said Julian Lee, senior energy analyst with the Center for Global Energy Studies in London. "But that will be a temporary effect -- even without Iraq there is still going to be too much supply."

Iraq exports about 800,000 barrels of oil a day, or roughly 1 percent of daily worldwide consumption of 75 million barrels. The nation is allowed to export oil only under a UN program requiring all revenues to be spent on food and relief supplies for Iraqi citizens, or on reparation payments the country owes for its actions in the Gulf War.

Russian companies including LUKoil and Rosneft are the biggest traders of Iraqi oil under this program, buying and reselling about 30 percent of Iraq's oil-for-food exports, The Associated Press reported Tuesday. Russian firms will trade about 40 million barrels, or about $600 million worth of Iraqi oil, in the first half of 1998.

LUKoil and Rosneft spokesmen declined to comment Tuesday on the commission the companies receive for the oil trades.

Suspension of Iraqi exports may not have entirely negative consequences, however. Russian companies competing against Iraq in Mediterranean oil trade might command a higher price for their crude in Iraq's absence, said Stephen O'Sullivan, director of oil and gas research at MC Securities, London.

Russia and Iraq produce roughly the same quality of oil and are the main sellers of this medium-grade crude in the Mediterranean. Russian companies that ship a high percentage of their crude out of Black Sea ports and on to the Mediterranean include Rosneft, LUKoil, Surgutneftegaz and Sibneft, according to FSU Energy export figures.

Aside from the oil-for-food program, Russian and Iraqi oil interests are entwined in many other ways. Many believe Russia's interest in Iraqi oil development has in part motivated Russia's peacekeeping stance in the Iraq conflict.

LUKoil, however, is the only Russian company to have signed a deal with Iraq to date. LUKoil and the Iraq National Oil Co. last year agreed to jointly develop the Southern Qurnah field, a deposit containing about 6 billion metric tons of oil. LUKoil owns 52.5 percent of the $4 billion project and has been promised extremely favorable taxation and profit-sharing terms, said Matt Thomas, an oil analyst with Creditanstalt-Grant.

But LUKoil cannot begin investing in the Southern Qurnah project until UN sanctions are lifted. And Thomas said he questioned whether Iraq would maintain the favorable terms of the deal once sanctions have ended.