Following the UAE’s Lead, Iraq Warns It Could Leave OPEC. Here’s What That Would Mean for Oil Stocks

The United Arab Emirates (UAE) shocked the global oil market in April when it announced it would leave OPEC in May. The UAE had been an OPEC member since 1967 and was the third-largest oil producer in the group before its surprising exit. Leaving OPEC frees the UAE from production quotas, allowing it to increase its production at will.

Now, Iraq is warning OPEC that it could also leave the group. Here’s why and what that would mean for oil stocks.

Iraq wants to increase its output

Iraq is considering leaving OPEC if the cartel doesn’t allow it to meaningfully increase its oil production. That would be an even more devastating blow to the group than the UAE’s exit. Iraq is currently OPEC’s second-largest oil producer behind Saudi Arabia. Further, it’s one of the five founding members of OPEC, which formed the organization in Baghdad, Iraq, in 1960.

Iraq’s current quota is 4.378 million barrels per day (BPD). However, its output has been significantly below that level due to the disruption to the Strait of Hormuz caused by fellow OPEC member Iran. It produced only 1.48 million BPD in May, down from nearly 4.2 million BPD before the closure. That’s having a significant impact on its economy, as Iraq gets most of its income from oil sales.

The country’s new prime minister, Ali al-Zaidi, wants to rebuild his country’s economy and attract more foreign investment. As part of that aim, Iraq wants to increase its oil production to 7 million BPD in the coming years. If OPEC won’t allow it to reach that target, Iraq could follow the UAE and leave the cartel to pursue its independent strategy.

What this would mean for oil stocks

If Iraq ultimately leaves OPEC, it would allow the country to significantly increase oil production. That would likely put downward pressure on oil prices in the coming years, especially as the UAE increases output and Iran and Venezuela are also likely to pump more oil. Those lower oil prices would hurt the profitability of producers that maintain their production.

However, some oil companies stand to benefit from increased Iraqi oil production. For example, Chevron (CVX +0.61%) entered exclusive talks with the country earlier this year to take over operations of the West Qurna 2 field. It’s one of the largest oil fields in the world, responsible for 0.5% of global supply and nearly 10% of Iraq’s output. Chevron also signed a deal last year for the Nassiriya project, which includes producing fields and exploration blocks. Chevron could invest capital to help Iraq grow its production, providing the oil company with another future growth driver.

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Fellow oil giant ExxonMobil (XOM +0.38%) could also benefit if Iraq leaves OPEC. The company signed an agreement with the country last year to develop its massive Majnoon oilfield and expand its oil exports. Majnoon is one of the largest oil fields in the world, with an estimated 38 billion barrels of oil. Investing in expanding Iraq’s production would provide Exxon with another long-term growth catalyst.

An interesting development to monitor

Iraq wants to tap the full potential of its oil resources, but it can’t do so under OPEC’s current quota. If OPEC won’t raise its production quota, Iraq could leave the cartel. That would be another devastating blow to the group, which recently lost the UAE. While rising production from these countries would push down oil prices and producer profits, it would also benefit oil giants Exxon and Chevron, which would have more freedom to increase production from Iraqi fields. That makes it an intriguing development that oil investors should watch.