UAE Withdraws from OPEC: Limited Short-term Impact, Medium-term Oil Price Downward Trajectory

The United Arab Emirates (UAE) announced that it will officially withdraw from OPEC on May 1st, and within hours, Wall Street has begun assessing the impact on the energy market for weeks and months to come.

Analysts from J.P. Morgan, UBS, and Bloomberg are highly consistent in their core judgment: Brent crude is unlikely to experience significant fluctuations in the short term, as the blockade of the Strait of Hormuz remains the primary bottleneck constraining energy exports from the Gulf.

On the day of the announcement, the spot price's reaction to the news was almost negligible, falling only 1% from the daily high, still accumulating a 3% increase for the day.

However, the medium-term outlook for Brent is gradually becoming overshadowed by clouds. Once a peace agreement is reached between the US and Iran, and Hormuz shipping returns to normal, the UAE will be able to freely expand production beyond the OPEC quota system. At that time, the global crude supply will face a new round of shocks, the price floor supporting capacity of the oil cartel will be further weakened, and the downward risk for Brent after the normalization of Gulf exports will also rise accordingly.

The UAE's historic split with OPEC aligns with the country's long-term strategy and economic planning. This move reflects the evolution of the country's energy policy - while continuously maintaining market stability in a responsible manner, enhancing flexibility in responding to market dynamics. This member, who has been in the oil cartel for nearly sixty years and is now the third largest oil-producing country in OPEC, will officially leave on May 1st and may start increasing crude production in the following months.

J.P. Morgan analyst Ian Mitchell said to clients:

The UAE has announced its departure from OPEC. The short-term trend of crude oil prices will continue to be dominated by the situation in the Strait of Hormuz, but this withdrawal is likely to mean that medium-term oil prices will be lower than initially expected, although the influencing factors are complex.

In terms of closing out long positions in European oil and gas stocks, it is better to be early than late.

Mitchell cited a key statement from UAE Energy Minister Suhail Mohamed al-Mazrouei last year: "If the market demands, we can achieve a daily production of six million barrels." However, the official production target of five million barrels per day by 2027 remains unchanged.

The impact on oil prices - limited in the short term, and facing greater downward pressure in the medium term due to increased production by the UAE. The immediate impact of this announcement on oil prices is limited - as long as the Strait of Hormuz continues to be blocked, the UAE cannot expand exports, and production increases are out of the question.

In the medium term, oil prices are likely to decline after the normalization of the situation in the Middle East, as the UAE will no longer be constrained by OPEC quotas and can freely expand production. The ultimate impact, however, depends on several factors:

• The first is the current actual production level of the UAE.

• The second is how quickly the gap between the current (normalized) production and the actual maximum capacity can be closed - the UAE pledged in a statement on Tuesday to "continue to increase market supply in a responsible manner, according to demand and market conditions, step by step."

• The third is the reaction of the rest of OPEC members to the UAE's production expansion. However, Saudi Arabia and other members are unlikely to be willing to further reduce production to make room for the UAE's increased output.