Hours after the United Arab Emirates announced its official withdrawal from OPEC on May 1, Wall Street began assessing the impact on the energy market in the coming weeks and months.
Analysts from JPMorgan, UBS Group, and Bloomberg are highly consistent in their core assessment: Brent crude is unlikely to experience significant volatility in the short term, as the blockade of the Strait of Hormuz remains the primary bottleneck constraining Gulf energy exports.
On Tuesday, the spot price reacted minimally to this news, retreating only 1% from the intraday high and still accumulating a 3% gain for the day.
However, the medium-term outlook for Brent is gradually becoming clouded. Once a peace agreement between the US and Iran is reached and Hormuz shipping returns to normal, the UAE will be free to expand production outside the OPEC quota system. At that time, global crude supply will face a new round of shocks, further weakening the oil cartel’s ability to support prices, and increasing downside risks for Brent after Gulf exports normalize.
The historic split between the UAE and OPEC aligns with the UAE's long-term strategy and economic planning. This move reflects the evolution of the country’s energy policy—maintaining market stability responsibly while enhancing flexibility to respond to market dynamics. This member, which joined the oil cartel nearly six decades ago and is now OPEC’s third-largest producer, will officially leave on May 1 and may initiate crude production increases in the subsequent months.
JPMorgan analyst Ian Mitchell told clients:
The UAE has announced its withdrawal from OPEC. The short-term trend of crude prices will continue to be dominated by developments in the Strait of Hormuz. However, this exit likely implies that medium-term oil prices will be lower than previously expected, though the influencing factors are complex.
When it comes to profit-taking on European oil and gas stocks, it’s better to act early rather than late.
Mitchell cited a key statement made last year by UAE Energy Minister Suhail Mohamed al-Mazrouei: 'If the market requires, we can achieve a production level of 6 million barrels per day.' Nevertheless, the official target of raising production to 5 million barrels per day by 2027 remains unchanged.
Impact on oil prices—limited in the short term but facing greater downward pressure in the medium term due to increased production from the UAE. The immediate impact of this announcement on oil prices is limited—as long as the Strait of Hormuz remains blocked, the UAE cannot expand exports, making talk of production increases irrelevant.
In the medium term, oil prices may decline after the normalization of the Middle East situation, as the UAE will no longer be constrained by OPEC quotas and will be free to expand production. However, the ultimate impact will depend on several factors:
The first is the UAE's current actual production level.
The second is how quickly the gap between the current (normalized) production and the actual maximum capacity can be closed — in its statement on Tuesday, the UAE pledged to 'continue increasing market supply gradually and responsibly, in response to demand and market conditions.'
The third is the reaction of the remaining OPEC members to the UAE’s production expansion. However, it is unlikely that Saudi Arabia and other member states will be willing to cut production further to make room for the UAE’s increased output.
Before the US-Iran conflict erupted, the UAE’s daily production in February was 3.4 million barrels. JPMorgan’s pre-war forecast estimated the UAE’s average daily production this year at approximately 3.9 million barrels, with OPEC’s 12-country total production at 28.9 million barrels per day and the broader OPEC+ total production at 37.7 million barrels per day.
UBS Group analyst Henri Patricot’s preliminary analysis of the UAE’s exit from OPEC reached a conclusion consistent with JPMorgan’s: while the Strait of Hormuz remains blocked, the short-term impact on oil prices will be limited; however, once Gulf exports normalize and Abu Dhabi is free to expand production outside the quota system, the medium-term outlook will turn significantly bearish.
Patricot told clients:
The short-term impact is limited, but medium-term oil prices face downside risks.
Given that the timing and pace of the reopening of the Strait of Hormuz remain key drivers, we believe this announcement is unlikely to have a material impact on near-term oil prices. The UAE’s exports are already at their maximum achievable level, and any production increase will not be feasible until the Hormuz shipping route is fully restored.
Looking further ahead, this announcement is likely to be bearish for oil prices.
Prior to the conflict, the UAE's daily crude oil production was 3.6 million barrels, nearly 1 million barrels short of its capacity limit of 4.5 million barrels per day (as estimated by UBS Group). With several new projects set to come online, the country's capacity is expected to increase to 5 million barrels per day by 2029. Abu Dhabi National Oil Company stated that current capacity has reached 4.85 million barrels per day, with a target of reaching 5 million barrels per day by 2027.
The UAE has never previously achieved a daily crude oil output exceeding 3.7 million barrels. However, we believe that once the Strait reopens, the country has the ability to swiftly increase production if it so chooses.
The UAE’s statement suggests that its production increase may not immediately reach maximum capacity. Additionally, rising geopolitical risks stemming from weakened cohesion within the Gulf Cooperation Council could partially offset downward pressure on prices due to increased production.
The UAE is not the first member state to leave OPEC – Qatar and Angola have both exited in recent years. However, the UAE's departure represents a significant challenge for OPEC.
The UAE is a founding member of OPEC, having joined shortly after the organization's establishment in 1967 under the name of the Emirate of Abu Dhabi. It ranks as the third-largest oil producer, with the second-highest idle capacity among member states, accounting for approximately 25% of OPEC's total idle capacity. The departure of the UAE could weaken OPEC's future ability to manage the supply-demand balance in the oil market, potentially increasing long-term oil price volatility.
The risk of other OPEC members following suit and leaving will also rise. Apart from Saudi Arabia, no member state possesses idle capacity comparable to that of the UAE, although countries like Iraq already have plans to expand their production capacity in the coming years.
In terms of long-term economic impact, under an extreme scenario (which we consider unlikely) – if the UAE rapidly increases its production to 5 million barrels per day before the end of 2027, its oil-related GDP could surge by over 20%.
The assessment by Javier Blas, senior energy columnist at Bloomberg, aligns with views from JPMorgan and UBS Group: the short-term oil price impact will be limited, but the medium-term outlook is bearish.
The global oil market is currently experiencing an extreme supply shortage.
But perhaps weeks or months later, it may face a flood: the reopening of the Strait of Hormuz, coupled with the outbreak of a new price war. The last price war occurred in 2020 between Saudi Arabia and Russia. The next one might take place between neighbors – Riyadh and Abu Dhabi, standing on opposite sides.
The financial blog Zerohedge noted that it is certain that once peace is restored in the Middle East and shipping through the Strait of Hormuz normalizes, the UAE will be free to expand its crude oil production outside the OPEC quota system. This could create medium-term oversupply pressures, potentially driving down Brent and WTI crude oil prices and pushing the energy market into a "long-term low oil price" environment. The next question is whether Venezuela and other OPEC member countries will follow in the UAE's footsteps.
Editor/KOKO