UAE exit from OPEC is a big blow to the cartel’s influence on oil
The United Arab Emirates’ departure from OPEC this week will weaken the influence of the cartel and its leader Saudi Arabia on the oil market, and this development may lead to a decline in prices in the long term.
UAE became the most influential member of OPEC after Saudi Arabia. The country, along with Saudi Arabia, is one of the few members with meaningful spare generation capacity to influence prices and respond to supply shocks, said Jorge León, head of geopolitical analysis at Rystad Energy.
Reserve capacity is idle production that can be quickly deployed to respond to major crises. Saudi Arabia and the UAE control the majority of the world’s total spare capacity of more than 4 million barrels per day, making them particularly effective in times of trouble.
“The departure of the UAE therefore removes one of the key pillars that supported OPEC’s ability to manage the market,” Leon said in a note on Tuesday. He said OPEC would be “structurally weakened” as a result.
David Goldwyn, who served as the State Department’s special envoy and coordinator for international energy affairs from 2009 to 2011, said it was also a blow to the Saudis because it undermined their ability to manage OPEC as an organization.
Goldwyn told CNBC that Riyadh will have a significant ability to discipline the market with its own spare capacity, but the UAE will have a weaker hand because it is no longer a member.
The UAE’s decision to exit OPEC this Friday comes after weeks of missile and drone attacks by fellow member Iran. Tehran’s attacks on ships in the Strait of Hormuz have restricted the UAE’s oil exports, threatening the basis of its economy.
The UAE did not attribute its departure to the war. UAE’s exit was timed to limit disruption to other producers in the group, Energy Minister Suhail Al Mazrouei said in an interview with CNBC on Tuesday.
In fact, the UAE’s exit is unlikely to impact the market next year due to the strait being closed, Goldwyn said. Oil futures prices showed little reaction to the announcement on Tuesday.
However, John Kilduff, founder of Again Capital, said BAE’s departure could lead to a decline later. This undermines the cohesion needed among producers to prevent prices from falling too much during oversupply, the official said.
Al Mazrouei said the UAE wants greater freedom of action to make production decisions without OPEC restrictions and achieve the capacity target of 5 million barrels per day by 2027.
Andy Lipow, president of Lipow Oil Associates, said the UAE is upset with years of oil production cuts that the Saudis have imposed to support prices. Lipow said he watches Iraq and OPEC+ member Russia routinely exceed their quotas.
“Once the conflict between the United States and Iran ends and the Strait of Hormuz reopens, I expect the UAE to produce as much oil as possible using the spare capacity it has in reserve,” Lipow told CNBC. he said.
If oil demand is weak and there is a major oversupply in the future, the market could miss out on Saudi Arabia’s ability to put a floor under prices, Goldwyn said.
“There is a risk of serious volatility in oil prices as a result of this decision,” Goldwyn said. “But in the end, the UAE leaving OPEC does not prevent it from cooperating with OPEC when market conditions require cooperation.”
