The United Arab Emirates leaves OPEC

The oil industry is delivering more drama than last season’s Love is Blind reunion.

Starting tomorrow, the United Arab Emirates will no longer be a member of OPEC, marking one of the biggest shakeups to the oil cartel in decades.

A crude awakening

The UAE’s departure from OPEC after nearly six decades in the oil cartel can be chalked up to a mix of geopolitics and economics.

• The ongoing war in Iran has deepened fractures among key OPEC members while also triggering the closure of the Strait of Hormuz, a critical chokepoint for global oil flows.
• That’s limited OPEC’s ability to respond to one of its biggest supply shocks in recent memory.

However…The UAE has a built-in workaround, in the form of a $3.3 billion oil pipeline connecting its oil production centers to the Indian Ocean. This allows the country to reroute more than half of its oil exports around the Strait, a loophole most OPEC members don’t have.

• Analysts say this advantage, combined with frustration over OPEC production limits and growing tensions with heavyweight member Saudi Arabia, pushed the UAE towards the exit.
• Upon leaving OPEC, the UAE will be able to ramp up output and invest more freely as it prepares for an uncertain energy future. They’ve been a member of OPEC since 1967.

The impact: The UAE is OPEC’s third-largest producer, with its departure removing ~13% of the oil cartel’s production capacity. It also takes away one of the few OPEC members with meaningful spare capacity, a lever the group typically uses to stabilize global oil markets.

Big picture: The move further weakens OPEC at a time when its influence has been slipping. While the group still accounts for ~40% of global oil production, internal disagreements and a surge in US output have chipped away at its ability to steer markets in recent years.