UAE Unlikely to Flood Oil Markets Despite OPEC Exit, Kpler Says
The UAE may have quit the Organization of Petroleum Exporting Countries to free itself from output limitations, but the Gulf producer is likely to adopt a disciplined approach to increase its exports rather than flooding the markets in the event normal energy flows through the Strait of Hormuz resumes, according to trade intelligence firm Kpler.Any increase in flows from the UAE is likely to happen gradually, with several officials from the country maintaining that it will continue to have coordination and communication with other producer states despite not being part of the group anymore, said Amena Bakr, head of Middle East & Opec+ at Kpler, in an interview with."Do I expect the UAE to suddenly open the taps and flood the market? Let's say Hormuz opens tomorrow? No, I don't expect them to do that. Because that would kind of start a price war and increase the tension between the UAE and Saudi Arabia and the other neighbors," Bakr said."So, any increase will happen in a gradual process. And it will be also communicated, so don't expect a big jump in their exports if and when Hormuz opens," she said.The UAE in late-April decided to quit OPEC, after a nearly six-decade long association, in a development that shocked energy markets, citing long-term strategic and economic priorities and future energy plans.Previous disputes due to UAE's dissatisfaction with its quota allocations had led to a revision of its baseline a few years earlier. But it surprised markets with its decision to exit the group as it wanted to increase its capacity to 5 million barrels per day, expected to be delivered by 2027 or even as early as end of this year, Bakr said.The UAE is using the 1.8 mmbbl/d capacity Fujairah pipeline for its exports, while also constructing a second alternative pipeline to bypass the strait. The new pipeline is about 50% complete and is projected to be ready in 2027, helping the Gulf producer to double its capacity to export shipments without relying on the Strait."So the way they frame it is that it no longer makes economic sense for the UAE to be part of the OPEC, OPEC+ organizations because we are at a point now where the market needs more supply, and they want to have this flexibility after the resumption of Hormuz flows to increase that supply to the market without any constraints," Bakr said.According to Bakr, the ongoing energy supply crisis due to the Middle East conflict and the effective closure of the Strait of Hormuz, which handles almost one-fifth of global oil and gas flows, has removed any uncertainty from the market that UAE's departure from OPEC could have otherwise had. However, the exit of the group's third largest member will rob OPEC of its spare capacity."Spare capacity is firing power when it comes to managing the market. It's the kind of checks and balances, and it's really important for any group to hold spare capacity. And with the UAE exiting, you have 30% of spare capacity that was taken out," Bakr said."Is this [going to] cause a collapse of the entire system, of a collapse of OPEC? So, I think OPEC is still going to continue. It's going to evolve. Maybe they'll add more members in the future, it's going to, you know, take on a different form. The idea of market management, I think, is still significant and will be maintained."While UAE's exit could encourage other member nations to consider a similar strategy, the energy supply crisis is likely to help OPEC maintain cohesion within the group as it doesn't have to deal with the contentious issue of production cuts for the time being, Bakr said."You get tension when you impose cuts. And we're in a completely opposite situation now. We're in a situation where the market needs more supply," she added.In case of a normalcy in situation, which includes the complete unwinding of the voluntary cuts and a resumption of regular flows through Hormuz Strait, the OPEC could consider a fair distribution of UAE's quota among other members, Bakr added.