UAE’s OPEC Exit Could Erode Cartel's Cohesion

In recent years, the United Arab Emirates has been seeking to reduce its dependence on oil export revenue by diversifying into other economic activities. This was to an extent triggered by global consensus on energy transition that meant moving away from polluting fossil fuels towards renewable energy.

When seen from this perspective, UAE’s decision to sever its six-decade long relationship and exit from OPEC+ is not a big surprise. The producer’s exit from the oil cartel will allow it to increase its crude oil output towards its 5 million barrels per day production target as and when transit through the Strait of Hormuz restores and trade normalises. 

However, disruption caused by recent military action in the Persian Gulf region will mean UAE will likely reach its production target with a time lag, say late 2027 or in 2028. When it materialises, the additional supply will weigh on global oil prices.

At the same time, higher energy production and exports will lift government revenue and support budget surplus and balance of payments. The UAE was operating 20% below its sustainable capacity to adhere to OPEC+ quotas. 

The decision to exit reflects long-running tensions over OPEC+’s strategy of supporting prices through production restraint. 

The UAE accounted for around 10% of production among the OPEC+ eight - the group of producers bound by voluntary output cuts. But its production quota of approximately 3.4 mbpd was well below its reported capacity of 4.3 mbpd, leaving around 0.9 mbpd of potential output unused.  

For the UAE, the formal share of the 1.65 mbpd voluntary cuts was only around 144,000 bpd. But the producer argued that the quota system didn’t reflect its production potential. After investing $150 billion to expand capacity and targeting 5 mbpd by 2027, it was no longer willing to remain constrained. 

The intra-OPEC tensions have intensified as US shale and supply growth in Latin America have eroded OPEC+’s market power. With the group’s ability to support prices weakened, the value of sacrificing output has become harder to justify. Several members have already produced above their quotas or called for scrapping of quotas. 

The exit of OPEC’s third-largest producer substantially weakens the organisation and raises questions over its survival as an effective cartel. As the UAE increases output outside OPEC, the group’s share of global supply will decline, reducing its ability to manage prices. 

If the UAE successfully raises output and revenue outside the cartel, it could also undermine the value of membership for other producers with large reserves or ambitions to raise output. Venezuela is a good example.

There is a risk that the UAE’s exit would weaken OPEC+. It may encourage other members to consider leaving the cartel to pursue their own priorities. As OPEC+’s ability to support prices through production cuts declines, the benefits of membership will decline, particularly for countries with spare capacity or ambitions to raise output.

How would OPEC respond? There are two ways. OPEC may be constrained to consider relaxing its current strategy to retain members that may be questioning the value of membership. 

Alternatively, the UAE’s exit may reveal that Saudi Arabia and Russia were unwilling to compromise on their unofficial goal of targeting prices around $100 per barrel, even at the cost of losing a major producer. In that case, the UAE’s departure could lead to a slower unwind of production cuts, now that the loudest dissenter is out of the room, pointed out an expert.

Subject to restoration of normal passage through the strait, with higher production and weakened pricing power, crude prices are bound to decline over time. This would be good news for major importing and consuming countries such as India. Lower oil prices will help reduce energy inflation and possibly shore up the rupee. But these are not going to happen in a hurry.