"The darkest hour" arrives early! OPEC's second-largest oil producer is forced to shut down oil fields, with daily production cuts potentially exceeding 3 million barrels.

Caixin March 4 News (Editor: Xiaoxiang) Iraq has begun shutting down its largest oil field’s production and will further cut output significantly in the coming days. This is the most obvious sign of pressure on Middle Eastern oil-producing countries caused by the Strait of Hormuz blockade.

According to informed sources, as the second-largest OPEC oil producer, Iraq has started closing its largest Rumaila oil field and West Qurna 2 project. Once fully implemented, these shutdown measures will interrupt most of the country’s crude oil production.

According to two Iraqi oil officials, if tankers continue to be unable to navigate freely through the Strait of Hormuz and reach loading ports, Iraq will be forced to reduce production within days, with a reduction exceeding 3 million barrels per day.

Currently, the ongoing conflict in the Middle East has almost completely blocked shipping through the Strait of Hormuz, with only a few empty oil tankers remaining in the Persian Gulf available for loading. As a result, some of the world’s largest oil-producing countries are filling their storage facilities. For Iraq, this situation has become extremely critical. If the waterway remains blocked, other countries will eventually face tests as well. It is reported that Saudi Arabia is considering alternative export options.

JPMorgan analyst Natasha Kaneva and others stated in a report, “The continued paralysis of the Strait of Hormuz is ticking away second by second.”

Due to vessel shortages and increased navigation risks raising transportation costs for Middle Eastern crude oil, the freight rates for ultra-large oil tankers hit a historic high on Tuesday. Data from the London Baltic Exchange shows that the daily charter rate for ultra-large oil tankers delivering crude to China in the region is currently about $481,000.

This also indicates a sharp decline in the number of ships in the Persian Gulf region. According to data from oil brokerage firms and ship tracking sources, only 6 to 12 ultra-large crude carriers are available for booking in the Persian Gulf.

For Iraq, the vessel shortage is causing production disruptions. An insider revealed that the country has begun shutting down its largest oil fields, Rumaila and West Qurna 2, with about 1.2 million barrels per day of capacity already halted on Tuesday.

If the Strait of Hormuz remains closed to shipping in the coming days, the shutdown scale could expand to two-thirds of Iraq’s total oil output.

Previously, insiders disclosed that the Iraqi government had suspended oil exports from the semi-autonomous Kurdish region in the north to the Turkish port of Ceyhan. However, the Iraqi Ministry of Oil stated that the expected oil production cuts would not affect refining operations.

Slowing shipments

Cargo volumes at Iraq’s main southern loading terminals have dropped significantly. So far this month, only three oil tankers have loaded at the Basra terminal, more than halving from last month.

Currently, only three of Iraq’s seven loading points have tankers docked. At least ten ships that loaded Iraqi crude since February 21 remain stranded in the Persian Gulf, unable to pass through the Strait of Hormuz.

Earlier, insurance companies expanded war risk coverage, including more offshore areas near Oman, which further indicates rising shipping costs in the region.

The conflict in the Middle East that erupted over the weekend has caused intense volatility in global energy markets: on Tuesday, Brent crude oil prices broke above $85 per barrel, and European natural gas prices surged over 65% in the past two trading days.

Following weekend attacks by the US and Israel on Iran, energy facilities across the Middle East have become targets of retaliatory strikes. On Monday, Saudi Arabia shut down its largest refinery, and Qatar halted operations at its largest liquefied natural gas export plant due to drone attacks.

BP operates one of the world’s largest oil fields, Rumaila, jointly with Iraq and China National Petroleum Corporation. Data shows that the project’s daily output in 2024 exceeds 1.4 million barrels, up from about 1.2 million barrels early last year. West Qurna 2’s daily output is slightly below 500,000 barrels.

As the world’s largest oil exporter, Saudi Arabia is considering alternative routes for crude oil transportation after the slowdown in Strait of Hormuz traffic. The country is exploring a pipeline that runs through the country to the Red Sea coast to deliver oil to customers, but concerns over potential attacks by Iran-backed Houthi forces pose risks to this plan.

Earlier this week, JPMorgan’s report indicated that if the Strait of Hormuz is actually closed for more than 25 days, major Middle Eastern oil producers may be forced to halt production. In a report, analyst Natasha Kaneva and others wrote, “Beyond this timeframe, storage capacity limitations will force production to shut down involuntarily.”