The United Arab Emirates decision to leave OPEC is likely to have a dramatic impact on the producer group, which has been around for 65 years. It will also open the door to a price war when Gulf producers rush to regain their market share after the Iran conflict ends. The move is a surprise and comes at a time of unprecedented chaos in the energy markets. Gulf oil and gas has been largely paralysed by the Strait of Hormuz closure for the past two months, which has'muted OPEC’s ability to manage oil market in times of 'distress. Suhail Mohamed al-Mazrouei, UAE Energy Minister, said on Tuesday that the decision to leave OPEC was motivated by the need to meet the rising global demand for energy.

It may be true, but freedom to increase production without restrictions was probably an equally powerful motive - even if it wasn't altruistic. According to the International Energy Agency, in February, the UAE was OPEC's 4th largest producer, after Saudi Arabia and Iran. It accounted for about 12% total production.

The UAE's capacity is around 4,85 million barrels a day (bpd). They aim to increase this to 5 million bpd in 2027 – ambitions that did not sit well with OPEC’s current output curbs. Since years, rumors have circulated that the UAE might leave OPEC. The UAE, like other Gulf producers has vast oil reserves. It also enjoys some the lowest extraction costs in the world. It is therefore in a good position to make profits, even during periods of prolonged low prices. Abu Dhabi has found it increasingly difficult to justify Saudi-mandated production limits. The curbs can boost prices but also limit revenue, and they may cede market shares to competitors with higher costs. In addition, the window of opportunity to monetise oil is limited. The oil consumption is expected to peak within the next decade and then start decreasing as economies move towards renewables. The producers are therefore more motivated to maximize output than limit it for the sake of price stability in the long term. Saudi Arabia is struggling to curb overproduction, while the UAE has often exceeded its assigned quotas. This has led to a deterioration in relations between Riyadh, Abu Dhabi and Riyadh.

Saudi-UAE tensions are affecting conflicts in Yemen and Libya. Recent public reactions to Iran's attacks by the two Gulf states have been different.

The UAE's dramatic action not only marks a pivotal moment for OPEC, but could also be a turning-point in power relations within the Gulf.

SAUDI GETS A BLOW Riyadh has been a key player in the OPEC de facto leadership for many years. It is a central pillar to its strategy of projecting international power and dominating the region. The departure of a long-standing OPEC leader weakens 'this already fraying relationship. The alliance has been under pressure this year - first from the U.S. removing Venezuelan President Nicolas Maduro and then from the Iran War itself. OPEC has been trying to control the oil market for years by managing the crude production. The group, which controls 80% of the world's oil reserves today, has seen its share of production fall from 50% in 1970s to 30% today. Conflicts between some members are partially responsible for the shift, but it is the surge in non-OPEC oil supply, primarily from the U.S. Canada and Brazil.

In 2016, the OPEC+ Alliance, which included Russia, temporarily restored some of this lost influence. It was a powerful tool for managing price volatility and supply disruptions, as it encompassed more than 40% global production. Saudi Arabia's ability, however, to enforce discipline was crucial in ensuring coherence.

This move by the UAE will not only further erode OPEC’s market share, but it may also cause other OPEC+ member countries to doubt the wisdom of limiting production. It could weaken collective decision-making as well as increase the risk of more defections. This new dynamic, which could be triggered by the end of the Iran War, may also lead to a fierce battle for market share between major producers OPEC+ and the UAE, as well as the U.S., potentially causing a steep drop in oil prices, and years worth of turmoil.

BAD TIMING

The timing of the announcement could not be worse. Middle East is still reeling from Iran?war. The third-month-old, near-airtight Strait of Hormuz closure has trapped 13 million bpd of production of oil, or 13% of the global supply, and about a fifth of global liquefied gas flows. The blockade has stifled vital revenue for the region, and forced producers to close in on 10 million bpd.

Tehran's attack on the UAE, Saudi Arabia, Kuwait and Iraq - all OPEC member countries - was bound to?accelerate this split, underscoring the fragility of the group's unity. Iran's attack on the UAE and Saudi Arabia, Kuwait, Iraq, all OPEC member countries, was bound to accelerate the split. Shared membership does not guarantee shared interests, especially when it comes to national security or revenue.

Abu Dhabi, for example, has accused other Arab?states of failing to protect the city from Iranian attacks. This shows how security concerns have permeated economic decisions.

The turmoil is perhaps the most important thing. It has given the UAE an opportunity to leave without affecting the physical supply or the prices. The UAE isn't the first country that has walked away from OPEC. Qatar walked away in 2019, Ecuador in 2010 and Angola 2024. Abu Dhabi is the only country that has left with the same scale, capacity and regional influence.

This time it's different. Losing a "heavyweight producer" with ambitions to quickly expand production could strip OPEC's authority. After the Iran War subsides, and barrels are back on the market, the group could be less united than ever. This would suggest that OPEC is no more.

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(source: Reuters)