The UAE's exit from Opec caps years of frustration with a group that has proven unable to accommodate the ambitions of the world’s seventh-largest oil producer.
Abu Dhabi had long disputed its production quota under Opec+ and the group's assessment of its true output ceiling.
State-run Abu Dhabi National Oil Company’s $150 billion spending plan to develop the country’s hydrocarbon resources accelerated the growth of the UAE’s production capacity by nearly 40 per cent over the past six years to 4.85 million bpd today.
The UAE’s slated goal is to reach 5 million bpd of production capacity by 2027, which was brought forward from the earlier 2030 timeline. Production capacity is the maximum amount of oil a country can produce on a given day.
As part of the Opec+ supergroup, which limited its quota to 3.4 million bpd, the UAE was pumping close to 30 per cent below what it was capable of.
"They've invested so much in their capacity and they don't want to keep any idle capacity in the ground," said Amena Bakr, head of Middle East Energy and Opec+ Insights at energy analytics firm Kpler.
“The UAE did have grievances over its quota and it also had grievances over [the] assessment of its capacity. It was addressed at the time, and they decided to carry on and still be part of the group."
The tension was well documented, Helima Croft, head of global commodity markets at RBC Capital Markets, said in a note. The UAE had for years been "consistently pushing for higher production targets," resulting in what she described as "challenging inter-Opec dynamics."
However, the UAE reconsidered its commitment to the group following the Iran war, which led to one of the biggest supply shocks in history. Iran’s blockade of Hormuz and its strikes against Gulf energy infrastructure led to the collapse of around 8 million bpd of Opec supply in March alone, and with an estimated 12 million bpd of production in the region currently shut in, according to Kpler.
The UAE’s output nearly halved in March. Abu Dhabi’s output slumped 45 per cent to 1.89 million bpd, according to Opec’s secondary sources.
Timing, not intent
The timing of UAE’s departure could not have come at a more convenient time for the markets. With Hormuz closed and regional supply constrained, the announcement of the departure had almost no market reaction.
"The timing was done at a moment where it couldn't really have a market impact," Ms Bakr said. "You have all the supply locked in anyway."
The UAE leaving Opec had always been more about “timing than intent”, said Neil Quilliam, associate fellow for the Middle East and North Africa Programme at Chatham House.
The near-term price impact is negligible. S&P Global assessed the move as neutral for benchmark Dated Brent, with no immediate effect on market balances. However, the structural damage to Opec is considerable.
Spare capacity squeeze
Along with de facto leader Saudi Arabia, the UAE was one of the only members with any meaningful spare capacity, which refers to production a country can bring online within 30 days and sustain for at least 90 days, above current levels. With the UAE’s exit, Opec will have fewer buffers to manage the markets.
"Losing a member with 4.8 million bpd of capacity, and the ambition to produce more takes a real tool out of the group's hands," said Jorge Leon, head of geopolitical analysis at Rystad Energy. "Saudi Arabia is now left doing more of the heavy lifting on price stability, and the market loses one of the few shock absorbers it had left."
The bigger issue for the markets is what the UAE plans to do with its oil supply strategy once it goes solo. Sources familiar with the UAE’s decision told The National that the country planned to “gradually increase production to supply global markets” once the Strait of Hormuz was open for free transit.
Ms Bakr echoed the view and said she expects the UAE to produce oil well above its pre-war levels.
“They want the flexibility of not having a quota … producing whatever quantity they want. They want to supply the international markets, but also the domestic markets. They don't want constraints,” she said.
A reckoning for Opec
The departure has also forced a wider reckoning about Opec. Iraq and Kazakhstan have both struggled to comply with the group’s quotas. With the UAE’s imminent departure, the political cost of exit has now been visibly lowered.
"It's pulled the rug from under Opec+," said Vandana Hari, chief executive of Singapore-based Vanda Insights.
"In an increasingly fractured and polarised world, where nationalistic imperatives override everything else, does it make sense to be in an organisation that has essentially become all about sacrificing self-interest for the greater good?"
