Iraq has already halted production by increasingly restricting exports through the Strait of Hormuz. About 1.5 million barrels per day are reportedly offline, and officials have warned that number could reach 3 million barrels if the disruption continues.
At 3 million bpd, it is the largest supply loss in the modern market outside of sanctions or war.
According to the latest data from OPEC’s secondary sources, Iraq’s total oil production is hovering around 4.0-4.3 million bpd. Exports average between 3.2 and 3.4 million bpd, most of which are shipped from the southern terminals in Basra. China and India together account for about two-thirds of these flows, making Iraq one of Asia’s most important heavy crude suppliers.
This product is largely concentrated in the southern parts that feed Basra’s exports. Romilla alone has nameplate capacity of 1.4-1.5 million bpd and regularly produces well over 1.3 million bpd. West Qurna 1 is producing approximately 600,000 bpd, with a capacity of approximately 650,000-670,000. West Qurna 2 produces about 460,000 bpd, while development plans target 750,000-800,000. Zubair’s design capacity is around 700,000 bpd. The Maysan complex contributes about 300,000-350,000 bpd.
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Together, these areas account for most of Iraq’s export machinery. A 3 million bpd shutdown would effectively shut down most of the Southern System and remove a significant portion of medium and heavy barrels from international trade.
The obvious question is whether OPEC can replace that barrel.
And the answer depends on who you ask and how you define excess capacity. But even theoretically, it is a stretch. In December of last year, the EIA redefined the terms “maximum sustainable capacity” as the maximum a producer can reach in a year if all goes well, and “effective capacity” as the amount of fuel that can actually be brought online within 90 days and continue without damaging fields or infrastructure.
Let the terms “90 days” and “one year” sink in for a moment.
For precision, EIA defines excess capacity using the second of these terms.
So does OPEC really have the spare capacity to fill this gap?
Under these 90-day definitions, OPEC’s effective spare capacity is generally estimated at 3 to 4 million barrels per day. And almost all of them sit in just two countries: Saudi Arabia and the United Arab Emirates. Saudi Arabia accounts for about 2 million barrels per day in this cushion. The UAE contributes about 0.8 to 1.0 million barrels per day. The remaining OPEC members are increasing relatively small amounts.
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If the Iraqi shot-in approaches 3 million barrels per day, you’re no longer talking about sinking excess capacity. You’re talking about testing its external frontier and relying almost entirely on two producers that are growing rapidly, continuing to produce, and pushing barrels through the Strait of Hormuz that are currently under pressure. And additional capacity figures include anything that can take up to 90 days to activate.
OPEC could potentially activate all of its spare capacity, but that could take them months. Impulse is not instantaneous.
Just as important, the quality of the crude oil is important. Iraq’s exports are mostly composed of medium and heavy foods. Refiners in China and India, which together take two-thirds of Iraq’s exports, buy about 2.1-2.5 million bpd—and they are largely set up for these heavy grades. Substituting lighter grades changes yields, diesel production, and refining margins. This is already being played out in today’s hard-hitting raw variations.
And finally, even with the upside issue resolved, oil will still move.
Even if Saudi Arabia and the United Arab Emirates open the pipelines, most of these exports will still need to cross the strait. If traffic slows, if insurance costs rise, if tankers are delayed, the constraint shifts from upstream capacity to physical flow. Excess capacity in the field does not equate to barrels on board.
And time is important. The EIA definition allows up to 90 days to bring that oil online and hold it. Nine days of real-time feedback is a long time in the market. The 3 million bpd disruption does not give producers a comfortable ramp window. This leads to a reaction under stress.
So yes, OPEC has excess capacity on paper. But if the Iraqi shut-ins approach 3 million bpd and become longer, the debate will quickly stop being about the headline excess capacity and instead be about deliverable barrels — at the right quality, moving through active shipping lines. This is a much smaller margin of safety than the top line number.
By Julian Geiger for Oilprice.com
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