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Just when it looked like Iraq was becoming a regional leader it decided to halt a $2 billion pre-paid oil supply deal with China's state-owned Zhenhua Oil Co. despite aims to strengthen ties with China.

Iraq decided to end a deal with Zhenhua and sell its crude supply to other customers as oil prices continue to rise. The deal with the Chinese company, that was agreed upon earlier this year, would have seen 4 billion bpd of oil supplied each month. The oil was expected to be destination free, meaning Zhenhua could sell it to other companies.

However, government officials in Iraq are making the countrys budget priority clear as the State Organization for Marketing of Oil (SOMO) deputy director-general Ali al-Shatari stated, "For the time being we may say it is not applicable at this stage because of oil prices, which are high and we are in a better position and we are even generating additional profits in excess of what the Iraqi budget needs."

The end of the Zhenhua deal follows recent announcements of big oil backing away from Iraq. Earlier this month, oil super-major, BP, said it wanted to change its operations in Iraqs supergiant Rumaila oil field, to create a stand-alone company.

U.S. super-major ExxonMobilannounced its intention to withdraw from Iraqs West Qurna 1 oil field. And Royal Dutch Shell got out long ago, ceasing operations in Iraqs supergiant Majnoon oil field in 2017 and West Qurna 1 in 2018.

Related: U.S. Agrees To Lift Iran Oil Sanctions There are several reasons for the Western supermajors exit from Iraq, including the movement away from traditional oil and gas towards low-carbon projects, persistent corruption in Iraqs oil industry, and Chinas dominance of Iraqi oil.

However, we mustnt overlook the fact that oil prices in Iraq have been steadily increasing since the beginning of the year, as the government promises higher export levels. SOMOs crude was going for $65.842 a barrel in May, up 23.5% from January. And now Iraq is expecting as much as $80 a barrel, although no timeframe has been given for this confident prediction.

Iraqs oil exports have been strong in 2021, as the third-largest oil exporter to China, after Saudi Arabia and Russia, and the top supplier to India last month. Iraq has been setting its sights on China and India, as oil demand from the two Asian giants looks set to continue well into the next decade.

As the countrys Basrah Medium crude grows in popularity and production picks up after a recent agreement with OPEC+ on supply, export levels will steadily increase throughout the rest of the year. Iraq exported 1.013 million bpd of Basrah Medium in May, up from 891,000 bpd exported in January, around a 14% increase.

OPEC restrictions on output had limited Iraqs oil exports, but the easing of these constraints will allow Iraq to produce 4.016 million bpd in July, an increase from 3.954 million bpd in June and 3.905 million bpd in May.

Related: Rising Demand Closes The Gap Between WTI And Brent Prices

But Iraq will have to maintain its competitive position in the market if it wants to maintain its regional reputation as a key oil and gas exporter, with neighboring Iran expected to take center stage upon a nuclear agreement with the U.S.

Just this week, Iran announced that the U.S. had agreed to remove all oil sanctions on Iran, although Washington has not yet confirmed this move. If this were true, it would unlock Irans 208.6 billion barrels of proven oil reserves, allowing it to become a major international player once again.

As Iraq focuses its exports on China and India, following the distancing of Western supermajors from the country, it will have to foster these relationships well if it wants to maintain its competitive edge in the region before Irans oil operations get back into full swing.

By Felicity Bradstock for Oilprice.com

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