Iraq threatens OPEC exit, oil could fall below $50 a barrel

Iraq's warning that it could exit the Organization of the Petroleum Exporting Countries threatens to shatter the cartel's remaining production discipline, with analysts warning crude prices could fall below $50 a barrel if members abandon output restraints.

"The world rejecting OPEC controls could usher in oil below $50 a barrel," said Robert Yawger, director of energy futures at Mizuho Securities USA. "If everyone starts producing as much as they can and putting those barrels on the market as fast as they can, oil could deep dive."

Brent crude, the global benchmark, has already retreated to about $75 a barrel from a war-driven peak above $115 in March, as the closure of the Strait of Hormuz disrupted supply from Iran and other Gulf producers. Iraq, OPEC's second-largest producer behind Saudi Arabia, pumped just 1.48 million barrels per day in May, down from nearly 4.2 million BPD before the waterway's closure, according to Iraqi government sources.

The threat follows the United Arab Emirates' departure from OPEC on May 1 after years of discord over quota restrictions. Iraq, one of the five founding members that formed the cartel in Baghdad in 1960, is now demanding the right to boost output to as much as 7 million BPD in the coming years — far above its current quota of 4.378 million BPD. Petroleum sales account for 90% of Iraq's state budget revenue, and Prime Minister Ali al-Zaidi's government is seeking to rebuild the economy and attract foreign investment after the war.

Why OPEC's grip is slipping

The cartel's ability to control prices has been eroding for years as the U.S. emerged as the world's top oil producer, creating a massive alternative source of supply. The Iran conflict and the Strait of Hormuz closure exposed the vulnerability of Gulf oil reserves, while the U.S. effectively took over OPEC's role as the global swing producer during the war, Yawger said.

Saudi Arabia retains the ability to add 2 million barrels or more to the market quickly from its spare capacity, giving it some control over prices. But the kingdom now faces a dilemma: either accept lower market share as members like the UAE and potentially Iraq ramp up output, or flood the market itself and risk a price collapse. The last time OPEC faced a similar fracture — when Saudi Arabia launched a price war in March 2020 — Brent crude briefly traded below $20 a barrel.

What an Iraq exit means for oil stocks

If Iraq leaves OPEC, the resulting surge in supply would pressure the profitability of producers that maintain current output levels. But the move could benefit major oil companies already positioning for Iraq's expansion. Chevron entered exclusive talks earlier this year to take over operations at West Qurna 2, one of the world's largest oil fields responsible for about 0.5% of global supply and nearly 10% of Iraq's output. ExxonMobil signed an agreement last year to develop the Majnoon oilfield, which holds an estimated 38 billion barrels of oil.

Any decision to increase production or withdraw from OPEC would likely come after al-Zaidi's planned visit to Washington in mid-July, according to Iraqi government sources cited by local news outlet Shafaq. If Baghdad follows through, OPEC would lose its second-largest producer in the span of three months, leaving the cartel's future as a meaningful price-setting body in serious doubt.

This article is for informational purposes only and does not constitute investment advice.