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Three of the most dangerous words in the oil market are "OPEC is dead." Its obituary has been written many, many times - always prematurely. Global finance provides another, equally storied phrase: "This time is different." The departure of the United Arab Emirates from the oil cartel, announced on Tuesday and effective May 1, is quantitatively more serious than previous withdrawals and poses the biggest existential crisis the group has faced since its establishment more than half a century ago.
The almost continuous exodus of member countries from the Organization of the Petroleum Exporting Countries during the past decade - Indonesia in 2016, Qatar in 2019, Ecuador in 2020 and Angola in 2023 - provided ample opportunity to prepare eulogies, all of which were proved wrong. But the UAE is in a different league: It's a country with ambitions to pump significantly more oil, it has the geological endowment to support its zeal and, more importantly, it has the money to transform its dream into a reality.
Its decision paves the way for others with ambitions to pump more oil to follow suit. Venezuela? Next in line, no matter what you hear today in Caracas. The government of Delcy Rodriguez remains committed to the cartel, but the relationship between Venezuela's opposition party, likely to take power at the next election, and OPEC has been historically hostile. If power changes hand, Venezuela is likely to follow in the UAE's footsteps. And looking at the wider OPEC+ alliance, it's clear that several of its members - most notably Kazakhstan - already have a foot outside the camp.
The timing of this week's announcement, in the middle of the Iran war, may prompt observers to link it to the military conflict. Sure, the UAE has been shocked by the Iranian attacks, the closure of the Strait of Hormuz and the ambivalent response from some of its neighbors, particularly Kuwait and Oman. But its move to quit OPEC has little to do with the Islamic Republic; the exit road started in Riyadh, with a detour in Texas.
With US oil and natural gas production surging on the back of its shale revolution, Abu Dhabi and Riyadh have fought a cold war over the cartel's direction for nearly a decade. To summarize, the UAE wanted to produce more, even at the risk of lower prices; the Saudis, allied with Russia, wanted to keep oil as close to $100-a-barrel as possible, even if that meant the group had to curb output, keeping barrels as spare capacity.
For most of the period, the fight was kept under wraps, but the Emirati push for higher production erupted into public view in July 2021, when Riyadh and Abu Dhabi clashed at an OPEC+ meeting, forcing the group to adjourn the gathering. The meeting didn't restart for several days, until the UAE backed down under immense Saudi pressure. It was a humiliating experience that Abu Dhabi hasn't forgotten. Now, the emirate is using the war as diplomatic cover. But make no mistake: UAE is leaving OPEC to produce more crude - against Saudi Arabia's interests.
Abu Dhabi was careful to avoid spooking the energy market, promising "to act responsibly, bringing additional production to market in a gradual and measured manner, aligned with demand and market conditions." But it's clear that UAE output is only headed one way: upwards. Before the war, the country was already pumping well above its OPEC official ceiling, producing about 3.7 million barrels a day of crude. It has the capacity to produce probably closer to 4.5 million barrels, and aims to be able to deliver 5 million by the end of 2027. Don't be surprised if it announces even more ambitious targets soon for 2030.
More UAE oil is exactly what the market will need later this year when - because it's a question of when and how, rather than if - the Strait of Hormuz reopens. With the waterway blocked, the global economy is draining its oil buffer, consuming barrels stored both in strategic reserves and commercial tanks. When the conflict is over, Abu Dhabi, free from the OPEC constraint, would be able to pump at will, providing the world with the barrels needed to rebuild those inventories, in effect putting a lid on prices.
The global oil market is suffering from extreme scarcity right now. In a few weeks, perhaps a couple of months, it may face a deluge: The reopening of the Strait of Hormuz and, simultaneously, a new price war. The last one was fought between Saudi Arabia and Russia in 2020. The next one may be a neighboring affair, with Riyadh and Abu Dhabi on opposing sides.
(COMMENT, BELOW)
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of "The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources."
Previously:
• The Iran war's most precious commodity isn't oil
• Our 'friends', the Saudis, are tightening the screws on U.S. oil shipments