UAE exits OPEC: a breakaway during the queen stage

In true Pogacar and bike racing manner, the United Arab Emirates made a splash on Tuesday by announcing its exit from the Organization of the Petroleum Exporting Countries, in short OPEC. This move, or in cycling jargon, this breakaway from the peloton during a period that could be seen as the queen stage, is somewhere between surprising and expected.

While there is possibly a greater angle to it, the economic rationale seems clear and convincing.

For years, the UAE has been following a long-term strategy aligned with their perception of the structural shifts in the energy market and beyond. This strategy includes past and ongoing substantial investments into oil and natural gas output, petrochemicals production, liquefied natural gas (LNG) exports, and pipeline and rail networks, not to mention the broader economic diversification beyond the energy business that brought the country to where it is today.

OPEC is anything but a cohesive group, with its members’ objectives aligned more opportunistically than strategically. From that perspective, the group’s cohesion over the past years was surprising, not least given the well-visible rifts. Specifically, Saudi Arabia and the UAE shared different views on oil policies earlier this decade.

Saudi Arabia pushed for production curbs; the UAE favoured a swifter normalisation and curtailment phase-out so that it could monetise its investments and capacity expansion. With the exit from OPEC, this greater flexibility and independence is granted. While the exit limits OPEC’s influence somewhat on paper, the de-facto leader and key policy implementer over the past years was Saudi Arabia, who not only showed the direction but also always did the heavy lifting in terms of production curtailments.

The petro-nations’ track record is streaked. Supply cuts stabilised prices during demand shocks such as in 2020 or propped up prices during phases of emerging tightness such as in 2021, but they are effective only temporarily and come with the risk of market share losses. This has been most evident since 2022 and with the advance of US shale oil and South American deepwater oil.

OPEC’s challenge is not the UAE’s exit but the tectonic shifts in the oil market more broadly. Besides US shale oil and South American deepwater oil, the energy transition, the shift to plug-in autos and trucks, and the shift to natural gas derived petrochemical feedstocks brings peaking oil demand.

In such a market environment, competition usually increases. These challenges are best addressed without any political constraints. The UAE’s exit from OPEC matches our longer-term view on the oil market, where ample supplies and increased competition anchor prices in the high $60s, a setting that emerged last year, and a setting that is very likely to return past today’s geopolitical turmoil.

The impact of the exit on regional politics goes beyond our expertise, but it comes at a time of greater realignment of relationships in the region and could advance the solution finding within the ongoing conflict.