The end of the OPEC era: what oil companies should prepare for

Alexey Gromov, Principal Director on Energy studies at the Institute for Energy and Finance, commented on the UAE's withdrawal from OPEC and OPEC+ and the possible consequences for the global oil market to the Chemical Aggregates industry magazine.

— Why have the Emirates announced their withdrawal from OPEC and OPEC+ right now?

The UAE has a long-standing political conflict with Saudi Arabia, which is not only related to oil. This has been a source of tension in the alliance for years. The second factor: The UAE has traditionally been dissatisfied with OPEC+'s policy of limiting production in recent years, because it was ready to produce more than it was agreed upon under the OPEC+ quota. The UAE budget is less sensitive to fluctuations in oil prices, especially in the pre-war period. Therefore, the problems have existed for a long time.

Now the situation has worsened, as the UAE, as a result of the Strait of Hormuz closure, is unable to export up to half of the oil produced in the country, that is, they already have problems, they cannot export up to half of the oil produced, they are forced to reduce production by more than 50% by the end of March-April.

In this situation, the Emirates has no strategic interest in participating in OPEC+ or in operational supply management, because OPEC+ currently has no influence on the market due to the blocking of the strait. As a result, there is a temptation to get out of any binding restrictions on oil production in order to take advantage of favorable market conditions and increase production and exports to cover the losses incurred by the country in connection with the ongoing crisis related to the closure of the Strait of Hormuz for more than 50 days.

— Do you believe in the "American footprint" in this decision?

There is a factor that should not be forgotten. Just a few days ago, the UAE authorities asked the United States for financial assistance in connection with the problems caused by the blocking of the Strait of Hormuz. So far, the United States has not responded to this request, but I can assume that perhaps one of the conditions for receiving financial assistance from America was a recommendation that the UAE should withdraw from OPEC+ and OPEC.

— What is the fate of OPEC and OPEC+?

— Now the UAE's withdrawal is a serious blow for both OPEC and OPEC+, because before that there were precedents for small states to leave OPEC.

Whatever decisions OPEC+ makes now, everything is determined by the possibility of exporting oil from the Persian Gulf countries, which obviously form the basis of the OPEC+ alliance. There is no such possibility now, so any decisions that will be taken at the leadership level of the alliance countries will not lead to any practical immediate or even medium-term changes in the global oil market. The alliance's market power is currently tending to zero.