The UAE’s withdrawal from OPEC this week weakens the influence of the cartel and its leader Saudi Arabia over the oil market, a development that could be bearish for prices in the long term.
The UAE was OPEC’s most influential member after Saudi Arabia. Jorge León, head of geopolitical analysis at Rystad Energy, said that along with Saudi Arabia, it was one of the few member states with meaningful spare capacity to influence prices and respond to supply shocks.
Reserve capacity is idle production that can be brought online quickly to deal with a major crisis. Saudi Arabia and the UAE together control the majority of the world’s total surplus production of more than 4 million barrels per day, making them particularly influential in times of disaster.
“The departure of the UAE would therefore remove one of the core pillars supporting OPEC’s market management capabilities,” Leung said in a note on Tuesday. As a result, OPEC will be “structurally weakened,” he said.
David Goldwyn, who served as the State Department’s special envoy and coordinator for international energy affairs from 2009 to 2011, said this is also a blow to Saudi Arabia because it undermines its ability to manage OPEC as an organization.
Goldwyn told CNBC that Riyadh still has significant ability to discipline the market with its own reserves, but that power will be weakened with the UAE no longer a member.
The UAE’s decision to withdraw from OPEC on Friday follows weeks of missile and drone barrage from fellow member Iran. The Iranian government’s attacks on ships in the Strait of Hormuz are curbing the UAE’s oil exports and threatening its economic foundations.
The UAE does not attribute its withdrawal to the war. Energy Minister Suhail Al Mazrouei said in an interview with CNBC on Tuesday that the UAE’s departure was timed to limit disruption to other producers in the group.
Indeed, with the strait closed, the UAE’s withdrawal is unlikely to impact the market next year, Goldwyn said. Crude oil futures prices on Tuesday did not react much to the announcement.
However, John Kilduff, founder of Again Capital, said the UAE’s exit could prove bearish later on. This undermines the cohesion among producers needed to prevent prices from falling too much in times of oversupply, he said.
Al Mazrouei said the UAE wanted more freedom to decide on production without OPEC restrictions and to reach its production capacity target of 5 million barrels per day by 2027.
Andy Lipow, president of Lipow Oil Associates, said the UAE was suffering from years of oil production cuts led by Saudi Arabia to maintain prices. Lipow said he had been monitoring Iraq and OPEC+ member Russia regularly exceeding their quotas.
“Once the U.S.-Iranian conflict ends and the Strait of Hormuz reopens, the UAE will use the excess capacity it has in reserve to produce as much oil as possible,” Lipow told CNBC.
Goldwyn said the market could overlook Saudi Arabia’s ability to set a floor on prices if oil demand is weak and there is a large surplus in the future.
“There is a significant risk that oil price volatility will increase as a result of this decision,” Goldwyn said. “But ultimately, if market conditions require cooperation, the UAE’s exit from OPEC will not prevent it from cooperating with OPEC.”
