UAE’s shock OPEC exit: What it means for the oil cartel’s future and for crude prices

The United Arab Emirates’ exit from OPEC this week will weaken the influence of the cartel and its leader Saudi Arabia on the oil market, a development that could prove bearish for prices over the long term.

The UAE was the most influential member of OPEC behind Saudi Arabia. It was one of the few members, along with Saudi Arabia, that had meaningful spare production capacity to influence prices and respond to supply shocks, said Jorge León, head of geopolitical analysis at Rystad Energy.

Spare capacity is the idle production that can be brought online quickly to address major crises. Saudi Arabia and the UAE together control a majority of the world’s total spare capacity of more than 4 million barrels per day, making them particularly influential during periods of distress.

The UAE’s “departure therefore removes one of the core pillars underpinning OPEC’s ability to manage the market,” León said in a note Tuesday. OPEC will become “structurally weaker” as a consequence, he said.

It is also a blow to the Saudis because it undermines their ability to manage OPEC as an organization, said David Goldwyn, who served as the State Department’s special envoy and coordinator for international energy affairs from 2009 to 2011.

Riyadh will still have a significant ability to discipline the market with its own spare capacity but it will have a weaker hand now that the UAE is no longer a member, Goldwyn told CNBC.

The UAE’s decision to exit OPEC this Friday comes after weeks of missile and drone barrages by fellow member Iran. Tehran’s attacks on shipping in the Strait of Hormuz has constrained the UAE’s oil exports, threatening the foundation of its economy.

The UAE has not attributed its departure to the war. Energy Minister Suhail Al Mazrouei told CNBC in an interview Tuesday that the UAE’s exit was timed to limit the disruption to fellow producers in the group.

Indeed, the UAE’s exit is unlikely to affect the market in the next year with the strait closed, Goldwyn said. Oil futures prices did not really react to the announcement Tuesday.

But the UAE’s departure could prove bearish later, said John Kilduff, founder of Again Capital. It undermines the cohesion needed among producers to keep prices from falling too much during supply gluts, he said.

The UAE wants more freedom of action to make production decisions without the constraints of OPEC and to reach its goal of 5 million bpd of capacity by 2027, Al Mazrouei said.

The UAE has chafed under years of oil production cuts led by the Saudis to support prices, said Andy Lipow, president of Lipow Oil Associates. It has watched as Iraq and OPEC+ member Russia have routinely exceeded their quotas, Lipow said.

“When the conflict between the USA and Iran ends and the Strait of Hormuz reopens, I expect that the UAE will produce as much oil as they can, utilizing any spare capacity that they have held in reserve,” Lipow told CNBC.

The market might miss Saudi’s ability to put a floor under prices if oil demand is weak and there’s a big surplus in the future, Goldwyn said.

“There’s significant risk of higher oil price volatility as a result of this decision,” Goldwyn said. “But in the end when market conditions require cooperation, the UAE leaving OPEC doesn’t prevent it from cooperating with OPEC.”