Global Glut
Market Braces For Flood of Iraqi Crude

Crude oil prices have fallen off a cliff since last June, and while the causes of this plunge are varied, they can be boiled down to a fairly simple discussion of supply and demand. Global demand for crude has stalled as European and Asian growth has slowed, while on the supply side the world is awash in oil as American shale producers find ways to keep output up in the face of declining profit margins and OPEC refuses to cut production in a bid to compete for market share. The end result is a market that’s oversupplied by roughly 1.5 million barrels per day, and as Bloomberg reports, there’s more oil getting ready to come on the market as Iraq prepares to boost its own exports:

[Iraq] plans to boost crude exports by about 26 percent to a record 3.75 million barrels a day next month, according to shipping programs, signaling an escalation of OPEC strategy to undercut U.S. shale drillers in the current market rout. The additional Iraqi oil is equal to about 800,000 barrels a day, or more than comes from OPEC member Qatar. The rest of the Organization of Petroleum Exporting Countries is expected to rubber stamp its policy to maintain output levels at a meeting on June 5. […]

Defying the threat from Islamic State militants, Iraq has been ramping up exports from both the Shiite south – where companies like BP Plc and Royal Dutch Shell Plc operate – and the Kurdish region in the north, which last year reached a temporary compromise with the federal government on its right to sell crude independently.

This isn’t just about the Saudi plan to squeeze out non-OPEC, higher-cost producers for market share—though it is that, too. This is also an attempt to fight for space within OPEC. Saudi Arabian production hit a high water mark in March, while Iran has plans to boost its own output if Western sanctions are lifted as a result of the nuclear agreement. Petrostates rely on oil sales to balance government budgets, and if OPEC continues on its charted course and chooses not to collectively cut production, then its members will need to pump more—much more—to generate the same amount of cash that they were at this time last year.

With producers seemingly tripping over one another to boost production, this battle for market share is becoming downright vicious. Prolonged low prices have incentivized the U.S. shale industry to cut costs and innovate its way back into profitability, but for OPEC the problem is more intractable. Regimes threatened by Arab spring unrest boosted welfare spending as a palliative measure, but with their primary source of revenue suddenly becoming a much less profitable venture they’re now faced with deficits. The world may be awash in oil, but make no mistake: this isn’t a good time to be selling it.

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