UAE Announces Withdrawal From OPEC. Will Kazakhstan Follow Suit? Global Oil Market Enters Low Oil Price Era?

TradingKey - On April 28, the United Arab Emirates announced that it will officially withdraw from OPEC and the OPEC+ alliance on May 1. The UAE stated that this move is intended to fulfill crude oil supply responsibilities. However, analysts suggest the real reason may be its long-standing disagreements with OPEC leader Saudi Arabia and anxiety over the destruction of oil demand.

The UAE is currently one of the largest producers within OPEC, having been a member for over 50 years. Following the UAE's withdrawal from the organization, will more countries follow suit, thereby weakening OPEC's capacity for collective action? What impact will this have on global oil markets?

UAE "Exits the Group": Repeated Failed Attempts to Increase Production and Long-standing Tensions with Saudi Arabia

On April 28, Bloomberg reported that UAE Energy Minister Suhail Al Mazrouei believes the crude oil market supply imbalance caused by the Middle East conflict provides an opportune moment for withdrawal. Given the current market supply deficit, the immediate impact of withdrawal on the supply-demand landscape is relatively limited. The UAE maintains that in the face of market volatility caused by war, the nation needs to respond to market demand more flexibly rather than being constrained by OPEC's collective decision-making mechanism.

Further analysis suggests that the friction between the UAE and OPEC leader Saudi Arabia has a long history, with disputes primarily centered on crude oil production quotas; the UAE has repeatedly sought to deploy investments in new production capacity without success. According to reports from MarketWatch, constrained by OPEC-mandated production quotas, the UAE's daily output was approximately 3.64 million barrels in February, prior to the outbreak of the war in Iran. The International Energy Agency (IEA) reports that the UAE's effective spare oil capacity is roughly 640,000 barrels per day. According to IEA projections, the UAE aims to increase daily production to 5 million barrels by 2027, up from about 4 million barrels in 2023.

Most likely to follow in the footsteps of the UAE: Kazakhstan and Iraq

MarketWatch noted that Kazakhstan and Iraq are the most likely to follow the UAE in exiting the organization. Kazakhstan is a member of the OPEC+ alliance, while Iraq is an OPEC member, and both countries possess spare crude oil capacity.

Matt Smith, Lead Oil Analyst at Kpler, identified Kazakhstan as the primary country of concern, noting its significant and sustained overproduction last year. While Kazakhstan was allocated a production quota of 1.6 million barrels per day for May, experts estimate its actual capacity is only slightly above that level, which likely reduces the current probability of its exit from the organization.

Rebecca Babin, Senior Energy Trader and Managing Director at CIBC Private Wealth, believes Kazakhstan may not yet be ready to exit. Antoine Halff, a researcher at Columbia University’s Center on Global Energy Policy, further pointed out that Kazakhstan might choose to stay following the UAE's departure from OPEC+ as its influence within the organization could increase.

Iraq has also chronically overproduced in recent years. Its primary revenue is derived from crude oil sales, but OPEC’s strict production quota system limits the possibility of increasing fiscal revenue. Furthermore, the country has endured years of conflict and urgently requires massive funding for infrastructure reconstruction and public spending, providing a rationale for Iraq’s potential exit from OPEC.

However, the latest reports indicate that both the Kazakh Ministry of Energy and Iraqi officials have stated they have no such plans for the time being.

OPEC Dominance Fades! An Era of Low Oil Prices May Be Ahead

The UAE is not the first member to leave OPEC; in recent years, Qatar, Ecuador, Indonesia, and Angola have all exited. However, Raad Alkadiri, a senior fellow at the Center for Strategic and International Studies (CSIS) and a veteran OPEC observer, believes the UAE's departure is unlikely to completely bring down OPEC unless it triggers a series of exits by Venezuela, Iraq, or Iran, which would lead to a substantive collapse of the organization.

Oil markets showed minimal volatility following the UAE's announcement of its withdrawal from OPEC, indicating that this factor is unlikely to shake high oil prices in the short term. UBS pointed out that the main reason is the current closure of the Strait of Hormuz, which prevents the UAE from increasing exports for the time being, thereby resulting in no material impact in the short run.

Analysts at energy research firm Rystad Energy also believe that the short-term impact of this factor may be relatively modest. However, given that OPEC has been structurally weakened and the concentration of its internal spare capacity has diminished, it will become increasingly difficult to regulate supply and stabilize prices. Pavel Molchanov, an investment strategy analyst at Raymond James, noted that a weakened OPEC means lower oil prices in the long term.

Bob McNally, founder of energy analysis firm Rapidan, pointed out that in the absence of effective market management, oil prices could become extremely volatile. The next time the global market faces an oversupply, major oil producers will once again face pressure to collaborate.