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June 12 (Reuters) - Standard & Poor's Global Ratings affirmed Iraq's sovereign rating at "B-/B" on Friday and removed the long-term rating from its negative watch list.

The agency gave a negative outlook, citing the risks of conflict in the Middle East over the next six to twelve months, including continued disruptions to export trade routes through the Strait of Hormuz and the potential for damage to infrastructure.

Iraq’s economy remains heavily dependent on the oil sector, which means it suffers greatly from the decline in crude exports through the strategic waterway.

Standard & Poor's predicted that oil production would average 2.9 million barrels per day for the entire year in 2026, down about 28 percent from the pre-war average of four million barrels per day recorded in 2025, attributing its forecast to current production levels and the fragile recovery expected in the second half.

The agency said that given that oil flows constitute more than 90 percent of budget revenues and merchandise exports, Iraq’s financial situation and balance of payments are likely to remain under pressure this year, forecasting a 15 percent contraction in real GDP this year.

Higher average oil prices during 2026 would provide some support for fiscal and external revenues, assuming a gradual recovery in oil exports in the second half, which Standard & Poor's said remains its baseline scenario.

The agency had placed Iraq’s long-term sovereign rating of “B-” on negative watch in March, citing the risk of a downgrade following a sharp drop in oil production linked to escalating conflict in the region.