We take a deep look at Iraq's role in the oil market and what it means for prices.
Iraq is back in the global news media headlines, as a militant group threatens violence across the country. Reacting to these latest developments, oil markets have increased decisively. In this week’s analysis, we will examine the role that Iraq plays in global oil markets, and outline various scenarios to allow you to protect your investments and profit from upcoming market swings.
Iraq: A Key Player In The Global Oil Markets
Iraq holds the fifth-largest crude oil reserves in the world, with an estimated reserve base in excess of 140 billion barrels. Only crude oil heavyweights such as Saudi Arabia, Iran, Venezuela and Canada hold greater reserves. In addition, Iraq’s reserves are even more significant because of the high quality of oil they hold, as well as the ease of extractability.
Specifically, Iraq’s oil reserves are rich in light, sweet crude, which customers (such as refineries) prefer to purchase because it is easier to refine into end products such as gasoline, jet fuel and diesel. The light, sweet crude is more cost effective to refine and is also easier on the machinery, therefore extending the life of the refining investment cycle.
This is in direct contrast to heavy, sour crude found in countries such as Venezuela. The heavy oil is much more costly to refine and refineries prefer to avoid it because it damages the equipment and requires heavy maintenance costs, which eats into the bottom line.
In addition, Iraqi crude is located a few hundred meters below the surface, therefore making extraction of it much easier and more cost effective. Oil companies prefer the Iraqi oil because extraction is so much easier, especially when compared with offshore oil reserves, such as those off the coast of Brazil that are located more than 7,000 meters underneath the sea, and more than 300 kilometers from the coastline.
Therefore, Iraq holds a unique position in the global oil markets not only because of the amount of oil it holds (top 5 globally), but also due to the quality of the crude it holds (light, sweet) as well as the ease of extraction (shallow onshore).