The Implications of the UAE’s OPExit

Since global stocks returned to all-time highs last month, erasing the sharp slide that followed the Iran war’s outbreak, many analysts have warned stocks are being complacent—overly optimistic about oil supply and dismissing the risk of a long crunch. It is funny to us how the opposite view gets little attention: What if markets are underestimating future supply? What if Gulf oil returns to the market faster and freer than folks expect? That scenario got a boost last week when the UAE announced its divorce from the Organization of Petroleum Exporting Countries (OPEC). While headlines bog down with the geopolitical implications (which we agree are interesting), to markets, oil supply considerations are more important.

In announcing their decision last week, Emirati officials cited the need to restore global supply once the war ends and their desire for production to be “unconstrained by any groups.”^[i] The implication: The UAE has spare capacity to rapidly ramp up exports once the Strait of Hormuz opens, but OPEC’s production quotas would prevent them from doing so. Hence, they are taking off the shackles while pledging to be a “responsible producer,” which is open to interpretation.

Loose pledges like that are nice, but concrete projections are even better. Enter the UAE’s ambassador to the US, Yousef Al Otaiba, with a Financial Times op-ed mapping out the country’s plans this week: “We have significant spare capacity and the infrastructure to expand it. We plan to invest tens of billions of dollars in new pipelines, port upgrades and hardened logistics to ensure our energy reaches the markets that need it, regardless of what happens around us. Our production capacity target is 5mn barrels per day by 2027.”^[ii]

In context, that is a pretty big jump. Last year, UAE oil production averaged 3.1 million barrels per day.^[iii] It currently has about 1.1 million barrels per day in spare capacity, give or take.^[iv] That means targeting 5 million barrels by 2025 implies a sizable infrastructure investment—not just drilling, but improving and expanding transit options (e.g., pipelines and export terminals). This, and the wording of Al Otaiba’s statement, strikes us as another step toward curbing the Strait’s long-term importance by building pipelines or transit options that circumvent it, which may take some of the regional risk premium out of oil prices.

As for the immediate supply implications, the UAE’s current spare capacity is around 1% of pre-war global production.^[v] Adding another million-ish barrels to that would be another 1%. While that isn’t huge, add it to recent and projected production increases elsewhere (Argentina, Guyana, the US, Norway and more) and Venezuela’s marketplace return. Then add in the supply currently stranded in the Strait and the production idled because of transit bottlenecks. All in, it becomes easy to envision a world that is pretty quickly awash in oil. Faster supply growth than people expect generally means lower oil prices than people expect. (And that is even before you consider the truly unpredictable wild card—what if Russia and Ukraine strike a peace deal?)

On its own, more oil supply and falling prices aren’t inherently bullish. Oil and stocks don’t have a fundamental relationship. But fear of high oil prices was a big part of stocks’ March slide. If headlines’ continued obsession with US efforts to open the Strait and every oil price wiggle is any indication, that fear lingers. A faster-than-feared supply return would be a sentiment balm, proving fears false and likely helping stocks climb the wall of worry.

Beyond that, we don’t think the implications are huge. We saw a lot of talk about the UAE’s exit being the nail in OPEC’s coffin. But OPEC’s importance has long been waning. Its production quota changes haven’t moved the needle on oil prices for years, thanks in large part to the US’s shale boom. By losing the UAE, OPEC exports will fall from about 19% of global supply to around 16% (based on 2025 tallies).^[vi] OPEC’s spare capacity will fall by about 30.5%.^[vii] The UAE was a key member of OPEC, but OPEC is less and less key to the world.

OPEC mattered in the 1970s. But the world has changed a lot since then. OPEC’s geopolitics are included in that, with most member states friendly to the US and the rest of the developed world. Most are also far more developed today, with economies diversified well beyond oil—another factor Al Otaiba cited in his Financial Times essay. If your economy no longer depends on oil rents, you don’t need to manipulate production to maximize revenue. Other nations may be further behind the development curve but are heading that way. OPEC’s obsolescence strikes us as a sign of regional economic progress as well as global production growth.

HT: Fisher Investments Research Analysts Alexander Leiken and Rachael Green