In light of the rising tensions between Middle Eastern countries, Iraq is looking to take advantage of the situation and increase its oil production up to 9-to-10 million barrels per day by 2020. We believe that Iraq's increasing oil production will significantly contribute to the global oil demand. The country's plan to enhance storage capacity, overcome infrastructure bottlenecks, establish oil export outlets, and develop oil fields connecting with export terminals will enable it to become second-largest oil exporter in the course of the next 20t years. Moreover, energy stocks and oil futures have shown a downside, after the International Monetary Fund warned of slow global economic growth in the coming years. OPEC has also cut its oil demand for the current year. However, in the longer run, we believe that oil consumption will significantly increase, and Iraq with its high production volume prospects, will step forward to help the world meet its oil demands.
According to the United States Energy Information Administration's forecasts, Iraq's oil production will increase up to 4.2 million barrels per day by the end of 2015. Iraq's easy geology, large amount of oil reserves, and low production costs make it an attractive area for oil drilling companies. The Iraqi government has given contracts to foreign companies like Royal Dutch Shell (RDS.A), Exxon Mobil (XOM), China National Petroleum Corp, British Petroleum (BP) and Lukoil (LUKOY.PK). Despite these companies optimizing their production, they still have not been able to achieve the desired targets; primarily because of infrastructure bottlenecks and legal threats of oil production linked with political uncertainty.
The IEA believes that crude oil prices will move up to $140 a barrel in 2035, after incorporating oil supply uncertainty, and $15 per barrel more if Iraq is not able to settle its oil sector reforms. If Iraq delays its oil reforms, the country will face lower oil production growth, and lose up to $3 trillion. In our opinion, as Iraq has to bring development in its post-war era, bringing oil sector reforms will be the first step toward this transformation.
On the other hand, the Iraqi government has anticipated much higher oil production volumes than the IEA. Iraq has estimated oil production of 9-10 million barrels a day by 2020, compared with the IEA's estimation of 6.1 million barrels a day. The country aims to enhance its oil export capacity and has strong plans to overcome infrastructure bottlenecks.
Due to a gloomy future economic outlook crude oil prices have dropped to near $90 levels. The dollar has also strengthened due to the increasing tensions between Turkey and Syria.
In our opinion, future oil price movements are unpredictable based upon uncertainties attached with the supply side, and the expected increases in global oil demand. The European crude market is already facing a tough time due to production issues in the North Sea area, and at the same time, increasing conflicts in the Middle East are threatening the supply side with volatility.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.