Iraq – after recording the largest volume of interruptions in oil supplies during the conflict between the United States, Israel and Iran – may witness a recovery in both production and exports after reaching an agreement with Iran. For the first time since the conflict began, an Iraqi oil tanker loaded with oil crossed the Strait of Hormuz on Sunday. The return of Basra barrels would provide a welcome source of medium and heavy sour oil for Asian buyers, primarily India, China, South Korea and Southeast Asian countries.
Market calls and trading:
- A somewhat slow return to Iraqi oil supplies over 3 months, with crude oil and condensate production rising from 900,000 bpd currently to more than 4 million bpd in late June and early July.
- About 17 million barrels of onshore reserves and more than 20 million barrels of Iraqi crude oil are in floating storage in the Persian Gulf, ready to move through the strait.
- A negative impact on oil prices if the return of more than 3 million barrels of Iraqi crude oil is achieved, with the impact appearing first on medium and heavy grades with high acidity.
Iraqi and Iranian officials have recently been negotiating terms to allow Iraqi crude to cross the Strait of Hormuz again. While no formal agreement has been announced, Iran appears to have granted Iraq a de facto exemption for its oil shipments, likely conditional on payment of transit fees. Kpler data supports this development: The Iraqi-owned vessel Ocean Thunder, which loaded nearly 1 million barrels of Basra Heavy oil on March 3, remained stuck in the Persian Gulf throughout March before crossing the strait on April 5. The shipment is expected to be unloaded at the Pengerang refinery in Malaysia on April 18, making it the first shipment of Iraqi crude since February 28.
Source: Kepler, Mapbox
On Sunday, Iraqi company SOMO requested lifting dates from buyers, including ship details and sizes, noting that all loading stations – including Basra – were “operating at full capacity.” However, uncertainty remains. Transit remains subject to tight control, and Iraq lacks fixed guarantees for uninterrupted passage. Furthermore, since Iraq sells crude oil on a FOB basis (i.e. transferring responsibility to the buyer once the cargo is loaded), buyer confidence will need to be rebuilt before volumes can meaningfully recover. However, after several successful trips, purchasing activity will likely accelerate quickly.
How quickly will Iraqi crude oil supplies return, and in what volume?
We estimate that Iraq has currently halted approximately 3.4 million barrels per day of crude oil production (from 4.25 million barrels per day of crude oil supply before the war to 875 thousand barrels per day now), largely due to export restrictions. The country remains heavily dependent on southern Gulf exports, with limited transformation options (about 200,000 barrels per day via the Kirkuk-Ceyhan pipeline) and limited storage capacity.
Although there were drone strikes in early March and again on April 4 – targeting storage facilities west of Basra and the northern Rumaila oil field – no significant damage was reported. The attacks appear to have hit equipment storage areas rather than critical infrastructure, indicating minimal remediation requirements.
In general, production shutdowns are primarily due to export bottlenecks rather than physical damage. However, we estimate that full recovery of Iraqi oil production will take approximately three months, depending on operational conditions.
Source: Kepler
Assuming transit arrangements continue, Iraq will first draw down its oil reserves (onshore storage is near 17 million barrels) and then increase supply. Initial shipments are expected to come from already floating volumes. Kpler data indicates that more than 20 million barrels of Basra crude are currently held in floating storage in the Middle East Gulf, with almost all of these 15 ships stranded in the Arabian Gulf. From there, it takes about 5 days to the Indian port of Jamnagar and about 19 days to the Chinese port of Zhejiang. Releasing Iraqi crude oil from onshore and offshore stockpiles will allow exports to recover to typical levels above 3 million barrels per day very quickly (an export pace of 3 million barrels per day over two weeks until stocks are exhausted).
Moreover, Iraqi crude oil and condensate production could rise from less than 900,000 bpd currently to about 3 million bpd by late May and exceed 4 million bpd in late June and early July. Major buyers include India, South Korea and China, especially Basra Medium and Basra Heavy, and they will be followed shortly by buyers from Southeast Asia such as the Philippines and Malaysia.
More bilateral agreements coming?
The clear arrangement between Iraq and Iran may indicate Tehran’s intention to demonstrate that direct talks with the regime can yield results and that negotiated access to the strait is possible – strengthening incentives to ensure the safe passage of Iraqi-laden tankers.
Source: Kepler
We appreciate that Iran’s broader strategy is to pursue multiple bilateral arrangements with “friendly” countries, granting transit permissions in exchange for security or transit fees. It is believed that there are already similar understandings with Pakistan and Bangladesh. Ultimately the goal will be an all-ship toll system (about $1-2 million per vessel, i.e. approximately 1% of the cargo value of crude oil tankers). This approach would allow Iran to generate revenues, deepen relationships with strategic partners, and gradually reshape regional trade dynamics — increasing long-term pressures on the United States.
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Source: Kepler
