Lack of Investment May Not Even be Enough to Raise Prices in a World Awash With Oil

Iraq's likelihood of achieving a record 5 million barrel per day output is "not unrealistic."

While the numbers of crude production versus those of demand have caused analysts to argue that the Organization of the Petroleum Exporting Countries' (OPEC) recent decision to extend its  production cuts need to be augmented by a deepening of cuts, news on Thursday indicates that even this might not be enough to rebalance the market.

That's because according to Wood Mackenzie Ltd., Iraq's plan to increase output to a record 5 million barrels per day (bpd) is "not unrealistic" as it prepares for the end of the OPEC initiative.

Ian Thom, principal upstream analyst at Wood Mackenzie, told BloombergMarkets, "From a production capacity point of view, the investment in a few of the southern fields is taking them closer to that number.

"They may be thinking ahead to the end of the nine-month period, when if they can demonstrate capacity of 5 million barrels, it may make for a different conversation with OPEC members."

Although Thom added that getting beyond 5 million bpd may prove challenging, Iraq's development of the West Qurna-1, Halfaya and Zubair oilfields will at least take it "a long way towards" 5 million - and, presumably sensing the negative impact Iraq alone will have on fundamentals, Saudi Arabia has indicated that OPEC would consider even longer output curbs to compensate.

The news comes on the heels of the International Energy Agency on Wednesday stating that crude production outside of OPEC will grow twice as fast in 2018 as it has this year, and will outpace demand that will raise global consumption above 100 million bpd for the first time ever.

And strictly from a price perspective, turmoil still lies ahead: according to the Financial Post, BP estimates that spending is down $700 billion to $900 billion over the last four years, and "the effects will hit global crude supply in 2019, 2020, and 2021."

Although at first glance this suggests that price spikes are impending, the Post argues that "this may not play out according to the old script": because, says BP, "The technology is getting better and better, and we are finding more and more oil and gas: there is an abundance."

However, this could weigh heavily in U.S. shale's favour and please those who hope for an end to offshore energy dependence: the Post notes that the ultimate losers in this tempestuous market "are those countries that require $80 or $90 a barrel oil to pay for their welfare states and balance their budgets" - in short, countries such as cash-strapped Venezuela and many other OPEC members.

In the meantime, the question is, how far can oil drop before it adversely affects even the Americans?

As far as Fereidun Fesharaki, founder and chairman of FGE is concerned, oil will drop to between $30 and $35 unless OPEC deepens its cuts immediately: "You have to cut another 700,000 bpd right away or prices will sink."