UAE's Opec exit raises questions as output plummets

The UAE's departure from Opec has reinforced Saudi Arabia's already dominant leadership of the group, but it also presents an opportunity for other members, including smaller ones, to gain greater influence over policy decisions.

The exit of the UAE from Opec and the wider Opec+ has shaken the alliance to the core and raised serious questions over the group's cohesion. It could even prompt others to reassess their membership in the group. But life outside Opec would be challenging. Most Opec members have historically relied on larger producers, particularly Saudi Arabia, to lead policy given its superior market knowledge and intelligence, in the expectation that its decisions will ultimately benefit all.

The UAE was perhaps unique among the group in its ability to go it alone. Unlike most other members, it has a proven ability to rapidly deploy new production capacity. And no other member, apart from Saudi Arabia, has the sort of deep oil market knowledge that would allow it to successfully navigate global oil markets.

Still, the importance of ensuring group cohesion could lend a greater voice to other members on policy decisions and potentially see Saudi Arabia adopt a more accommodating stance. After all, even the exit of a small African producer would present poor optics, particularly if it happens soon after the UAE's departure.

The chief candidates for a greater role in Opec, and by extension Opec+, are the group's other Mideast Gulf producers Iraq and Kuwait. Iraq remains Opec's second largest member and has ambitious plans to increase its production capacity from around 4.5mn b/d to 6mn b/d. While it has the reserves, the country has struggled to advance long-standing growth projects, including export capacity expansions, largely due to political instability. It is also paying the price of not building sufficient export infrastructure that would allow it to meaningfully bypass the strait of Hormuz. If Iraq is to play a more influential role within Opec, it may also have to assert greater control over production in the semi-autonomous Kurdish region, which has long undermined its credibility in the group.

Kuwait is also a major producer and one of the few members with significant spare production capacity. Before the effective closure of the strait, Kuwait was producing around 2.6mn b/d compared to its stated production capacity of about 3mn b/d. But while it has ambitious plans to boost capacity to 4mn b/d, recent additions have merely managed to counter natural decline. Its total reliance on the strait of Hormuz for its oil exports has also meant it has been one of the hardest hit members due to the closure of the waterway.

Other members such as Algeria may also clamour for a greater role. While its production capacity is smaller, the country its politically stable and is located outside the increasingly precarious Mideast Gulf region. It also highly values its membership for the international recognition this brings — something that is even more important to smaller African members. The UAE's exit could even prompt Opec to speed up efforts to sign up new members.

Opec+ crude output plummeted by 1.59mn b/d in April, Argus estimates. The drop left group production about 11mn b/d below pre-war levels and was mainly driven by further reductions in the Mideast Gulf as members had to shut in production due to the war and effective closure of the strait of Hormuz — their main export outlet (see table). Russia's output is also under pressure from Ukrainian attacks on its oil facilities.