MUFG’s Michael Wan notes United Arab Emirates' (UAE) surprise decision to leave OPEC/OPEC+ from 1 May, driven by dissatisfaction with quotas and significant spare capacity. The bank highlights potential production increases from around 3mb/day to 5mb/day after the crisis, and warns that further exits could erode OPEC's (Organization of Petroleum Exporting Countries) effectiveness, biasing Oil prices lower over the longer term.

UAE move undermines OPEC floor

"Beyond the Iran conflict, UAE announced in a surprise decision yesterday that it is quitting OPEC/OPEC+ starting 1 May. While this has been talked about internally within UAE for some time, the timing with the ongoing war and perhaps also the manner in which it was done was probably the more important surprise."

"Overall, the drivers among others seems to be dissatisfaction within UAE on production quotas by OPEC, and with Abu Dhabi having built up significant investment and spare capacity already this means that in theory oil production could be ramped up over time from around 3mb/day to perhaps up to 5mb/day after the crisis ends."

"Other key drivers of UAE’s decision could include disagreements with Saudi Arabia more broadly on a range of issues. The key question is also whether other members of OPEC/OPEC+ may see fit to leave the group, and ultimately erode the effectiveness of the group."

"Putting it all together, the near-term implications are minimal, but longer-term this could remove the effectiveness of OPEC to put a floor on oil prices and as such bias oil prices to be lower rather than higher over time."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)