UAE Announces Exit From OPEC. Wall Street Warns: Medium-Term Oil Prices Face Downside Risks

TradingKey - The United Arab Emirates (UAE) has officially announced that it will formally withdraw from the Organization of the Petroleum Exporting Countries (OPEC) and the OPEC+ alliance on May 1.

Bloomberg cited UAE Energy Minister Suhail al-Mazrouei as stating that the Middle East conflict has led to a global oil market supply imbalance, which provides a suitable window for the UAE's exit from OPEC.

He emphasized that the market is currently in a state of supply shortage, and the short-term impact of the UAE's exit on global supply and demand dynamics is relatively controllable. Faced with market volatility triggered by war, the UAE needs to adjust its production strategy more flexibly based on market changes, rather than being constrained by OPEC's collective decision-making mechanism.

In an official statement, the UAE noted that the decision to withdraw aligns with its long-term strategy and economic development vision, which will help accelerate the pace of investment in the domestic energy industry.

Bloomberg analysis suggests that the UAE's withdrawal poses a significant challenge to OPEC and its core leader, Saudi Arabia, while highlighting the profound impact of the Middle East conflict on the global energy market landscape. Currently, the global oil industry is fully grappling with energy supply disruption risks triggered by the conflict involving the U.S., Israel, and Iran.

OPEC was founded in 1960, with founding members including Saudi Arabia, Iran, Iraq, Venezuela, and Kuwait; the UAE joined in 1967. The organization's member states collectively contribute 36% of global oil production and control nearly 80% of proven oil reserves. OPEC adjusts production through collective decision-making to maintain international oil prices and supply stability, with production adjustments requiring the unanimous consent of all member states.

Oil prices fell in early Asian trading on Wednesday before slowly rebounding. Currently, WTI crude oil futures are fluctuating near $99 per barrel, while Brent crude oil futures are trading around $104 per barrel.

UAE Seeks Production Capacity Autonomy

Official statements point out that the UAE is accelerating its domestic energy industry investment layout, focusing on the long-term development of future markets, which requires the country to have the autonomy to independently formulate oil production policies. The statement also mentioned that geopolitical volatility in the Strait of Hormuz and the Arabian Gulf is reshaping the global energy supply landscape, while the trend of medium-to-long-term growth in global energy demand remains unchanged—this is widely interpreted as the UAE's intention to gradually release oil production capacity at its own pace outside the OPEC framework.

Against the backdrop of an accelerating global energy transition, the UAE hopes to maximize revenues through production increases before the peak of fossil fuel demand arrives, accumulating funds for its domestic economic diversification. After withdrawing from OPEC and the OPEC+ mechanism, the UAE can break free from the shackles of production quotas and independently and flexibly expand its oil production capacity and export volume.

At the same time, the continued escalation of conflict in the Middle East has heightened the UAE's sense of urgency. If regional infrastructure were to be damaged, extracting and selling oil in advance could effectively mitigate the risk of asset losses.

Data shows that before the outbreak of conflict in the Middle East, the UAE's oil production accounted for 10% to 15% of the total output of OPEC nations. Following its exit from OPEC, the country is no longer bound by OPEC production quotas and is free to expand its oil production scale.

Sergey Vakulenko, a former executive at Gazprom, analyzed that the UAE aims to increase production by 30%, a target unachievable under the OPEC quota system but feasible after withdrawal.

In addition, the UAE has for years been actively building oil pipelines that bypass the Strait of Hormuz. Leveraging the geographical advantages of the Port of Fujairah, its oil exports do not rely on the strait's shipping lanes, providing security for its independent production adjustments.

The UAE's ties with OPEC began in 1967 when it joined under the name of Abu Dhabi. After the UAE federation was established in 1971, its membership was maintained, spanning more than fifty years.

Long-standing rift between the UAE and Saudi Arabia

The UAE's withdrawal from OPEC and OPEC+ is not a sudden move; the seeds of its conflict with Saudi Arabia were sown long ago.

The core disagreement between the two sides centers on production quotas and competition for regional influence. The UAE has repeatedly attempted to advance investments in new production capacity within the OPEC+ framework, only to be frequently thwarted by Saudi Arabia's insistence on production cuts to support prices—a tension that has pushed the UAE to the brink of exit several times and has now finally materialized.

Currently, the UAE’s average daily oil production is approximately 4.05 million barrels, making it one of OPEC’s core members, with plans to increase capacity to 5 million barrels per day by 2027.

OPEC’s current 11 member nations include traditional producers such as Saudi Arabia, Iran, and Iraq. The UAE’s departure will directly undermine OPEC's ability to stabilize oil prices through collective production cuts. UBS analyst Matthew Cowley warned that the difficulty for OPEC to address oversupply will increase significantly during a cycle of global economic slowdown.

As one of the world's top ten oil producers, the UAE accounts for 3% to 4% of total global output. It has long been dissatisfied with OPEC's quota restrictions, seeking to break through production bottlenecks to align with its own pace of capacity expansion.

Bloomberg noted that divergences between the UAE and Saudi Arabia over oil policy and regional influence are long-standing, with frequent friction during OPEC+ meetings. The UAE's independent decision to withdraw further underscores the irreconcilable nature of these tensions.

Wall Street Sets the Tone: Limited Short-term Pressure, Medium-term Price Declines.

Hours after the United Arab Emirates announced its formal withdrawal from OPEC and the OPEC+ alliance effective May 1, several Wall Street institutions quickly moved to assess the event's short-, medium-, and long-term impacts on energy markets.

The current market consensus is that Brent crude prices are unlikely to see significant volatility in the short term, as the blockade of the Strait of Hormuz remains the primary bottleneck restricting Gulf energy exports.

However, the medium-term outlook for Brent crude has been clouded. Once a peace agreement is reached between the U.S. and Iran and shipping through the Strait of Hormuz returns to normal, the UAE will be free from the constraints of the OPEC quota system to independently expand its oil production capacity. At that point, global crude supply will see an influx of new volume, further weakening OPEC's ability to put a floor under oil prices, and downside risks for oil prices will rise in tandem.

JPMorgan ( JPM) analyst Ian Mitchell told clients that while international crude prices will continue to be driven by geopolitical tensions in the Strait of Hormuz in the short term, the UAE's exit from OPEC is highly likely to keep medium-term oil prices below previous market expectations, though the exact extent of the impact will depend on multiple factors.

Mitchell pointed out that these constraints include the UAE's current actual oil production scale and how quickly the gap between existing output and maximum capacity can be filled—the UAE previously pledged in an official statement to 'gradually expand oil supply based on market demand and actual conditions.'

Furthermore, the reaction of other OPEC members to the UAE's capacity expansion is also crucial; JPMorgan believes it is unlikely that core members like Saudi Arabia will further cut production to make market room for the UAE's supply increase.

Mitchell also cited last year's public statement by UAE Energy Minister Suhail Mohamed Al Mazrouei, who said, 'As long as there is market demand, we have the capacity to increase daily production to 6 million barrels,' while emphasizing that the UAE's official production target of 5 million barrels per day by 2027 remains unchanged.

Relevant data show that before the outbreak of conflict in the Middle East, the UAE's daily oil production in February was 3.4 million barrels. JPMorgan had previously forecast the country's average daily production this year at approximately 3.9 million barrels, while total production from the 12 OPEC nations was 28.9 million bpd and OPEC+ total production reached 37.7 million bpd.

UBS ( UBS) analyst Henri Patricot's assessment closely aligns with JPMorgan's, noting that while the short-term impact on oil prices is relatively limited while the Strait of Hormuz remains blockaded, medium-term prices will face significant downward pressure once Gulf oil export channels return to normal.

Patricot believes that once the Strait of Hormuz reopens, the UAE is fully capable of quickly ramping up production, though official statements suggest its expansion pace might not immediately reach maximum capacity. Additionally, escalating geopolitical risks resulting from declining cohesion within the Gulf Cooperation Council could partially offset the downward pressure on oil prices from increased supply.

Patricot also specifically emphasized that the UAE's exit poses a major challenge for OPEC. As a long-standing member and the third-largest producer, its spare capacity accounts for about 25% of OPEC's total spare capacity. The UAE's departure could weaken OPEC's future ability to manage the global oil supply-demand balance, drive up long-term price volatility, and potentially trigger a chain reaction of exits by other member states.

Javier Blas, a senior energy columnist at Bloomberg, similarly stated that while the current short-term impact on oil prices is limited, the medium-term trend is turning bearish.

He pointed out that while the global oil market is currently in a state of supply shortage, once transit through the Strait of Hormuz resumes, the market could quickly shift to a surplus, potentially even triggering a price war between Saudi Arabia and the UAE.