Oil market rattled by UAE exit

THE price of crude oil remains in backwardation as traders focus on how and when barrels can move through the choked Strait of Hormuz.

With a world hungry for barrels, the United Arab Emirates (UAE) has quit the Organisation of the Petroleum Exporting Countries (Opec) and the wider Opec+ group of major oil producers, effective this month.

This is not a minor exit and could have major implications for prices in future.

The country may be small in population, but it is a heavyweight in energy production.

The UAE was the fourth-largest Opec producer, at 3.5 million barrels per day (bpd) to 3.8 million bpd, accounting for about 12% of the cartel’s total daily output. Around three million barrels were exported.

The UAE aims to raise production to five million barrels by 2027, and Opec’s quota system would have constrained its ambition to fully utilise that capacity. With energy hungry buyers like China, Japan, India and South Korea lining up for spare barrels, the UAE is now in a sweet spot to respond.

However, it won’t be alone. Opec members like Saudi Arabia, Iran and Iraq would also be looking to up exports, if possible, to finance post-Iran war rebuilding.

As a result, crude oil prices could correct sharply if a peace deal is achieved.

For now, however, US President Donald Trump’s threat of escalation keeps crude oil prices biased to the upside, further supported by higher insurance, transit and security costs feeding into pricing.

With renewable energy capacity growing, and the United States and other non-Opec members like Brazil and Guyana emerging as oil and gas exporters, Opec+ pricing power is weakening. That said, Opec members leaving the cartel is not new.

The UAE, if the need arises, could rejoin the cartel or maintain a working relationship that ensures producers like itself still have control over prices without undermining sovereignty over its hydrocarbon resources.