The UAE's exit from Opec has raised questions about the group's ability to stabilise oil markets at a time when surging US production has left it with less leverage than at any point in recent history.
The Emirates' departure, effective on Friday, removes a key swing producer and comes at a moment of mounting pressure for the organisation and its expanded Opec+ group, as they confront a historic supply shock and internal compliance issues.
“This definitely throws into doubt the ability of Opec+ to continue market management going forward,” said Abhi Rajendran, non-resident fellow at Rice University's Baker Institute.
“The UAE breaks off and does its own thing. What's stopping some of the other members?”
Shrinking market share
The share of global crude from Opec+ producers has fallen from about 53 per cent on its formation in 2016 to 46 per cent today, according to the US Energy Information Administration.
Supply from producers outside the group, led by the US, Canada, Brazil, Guyana and Argentina, has challenged Opec’s dominance. The US alone accounts for 90 per cent of the increase in global oil supply between 2015 and 2024. The country's output has surged by more than 8 million barrels a day to more than 20 million during that period, according to the International Energy Agency.
With Asian and European buyers rushing to replace lost Middle Eastern supply from the Iran war, US crude exports surged to 5.2 million bpd in recent weeks, pushing Washington's net crude imports to just 66,000 bpd, the lowest on record. The US is now on the brink of becoming a net crude exporter for the first time since the Second World War.
Peak demand
The prospect of peak demand adds another layer of pressure. Opec expects oil consumption to keep growing, but the IEA expects demand to plateau at 105.5 million bpd by the end of the decade, with peak combustible fuel demand arriving as early as next year.
For producers like the UAE, constraints on low-cost production due to quotas imposed by Opec come as the window to maximise revenue is narrowing.
“With demand nearing a peak, the calculation for producers with low-cost barrels is changing fast and waiting your turn inside a quota system starts to look like leaving money on the table,” said Jorge Leon, head of geopolitical analysis at Rystad Energy.
Copycat risk
Whether or not the UAE's exit from Opec creates the risk of copycats and a further splintering of the organisation remains an open question.
“I think that's possible,” said Karen Young, a senior research scholar at Columbia University's Centre on Global Energy Policy, pointing to Kazakhstan.
Ms Young noted Astana's constraints stem from its dependence on Russian pipeline infrastructure for exports rather than its frustrations with Opec itself. She called the UAE's move “a signal of independence”.
“I think that extends to other organisations,” she said, referring to the UAE's review of its strategic alliances after the Iran war.
Fewer capacity buffers
The Emirates' exit also leaves Saudi Arabia as Opec's sole swing producer. Its production fell 23 per cent to 7.8 million bpd in March after Iranian strikes on energy infrastructure. With effective Opec+ spare capacity already at just 0.3 million bpd, Riyadh must now defend its prices against a wave of non-Opec supply with limited resources to offset.
“Saudi Arabia has the most to lose here,” Mr Rajendran said. “Market management is going to be trickier going forward.”
Non-Opec producers are on track to add supply exceeding global demand growth for the foreseeable future. Asian and European buyers are already looking to them for future supplies to diversify away from the Middle East.
Producers in the Gulf have long prided themselves on being reliable suppliers of energy, honouring contractual obligations to buyers on time. Iran's blockade of Hormuz and its attacks on vital sites have, however, forced several producers to declare force majeure on supply to the market.
“The notion of the reliability of the Gulf as a group of suppliers has been thrown in the air,” Mr Rajendran said.
The UAE leaving Opec is one way to manage its output without constraints, and bring more supply to the market at will.
The other question hanging over Opec as it navigates a future without a core member is the status of founding member Iran.
“What does the Iran-Saudi relationship look like three years from now? Could Opec function more cohesively and collaboratively? That's going to be a big challenge,” Ms Young said.
