OPEC Continues Production Increases Amid UAE Departure and Record Exports

The seven-member OPEC production group, which has restricted output since 2023, is expected to extend a series of production quota increases initiated following attacks by the United States and Israel on Iran, which have sparked renewed conflict in the Middle East. However, the United Arab Emirates has been exporting record volumes of crude oil internationally immediately after leaving the OPEC alliance.

According to unnamed sources speaking with Reuters, the seven-nation OPEC group, including Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Kazakhstan, and Oman, is likely to decide to increase production quotas for August by 188,000 barrels per day, having previously agreed to a similar production increase for July. Unlike previous increases, this one may actually materialize.

Conflict Background and Impact on Production

OPEC has increased production nearly continuously since the conflict began, but these increases have largely remained on paper as production in the Persian Gulf remains paralyzed by hostile activities and Iran's decision to close the Hormuz Strait. This decision has forced Gulf producers to store what they can and subsequently begin deploying oil tankers.

Iraq has been particularly severely affected by the Hormuz closure, with production dropping from over 4 million barrels per day to less than 2 million barrels per day.

The production increases to date have likely been aimed at reassuring traders that once production can be increased, Gulf nations will do so, while producers like Russia and Kazakhstan, unaffected by the Hormuz situation, will ramp up to mitigate the Middle East supply shock.

UAE's Departure from OPEC and Increased Exports

Meanwhile, the United Arab Emirates has decided to leave the oil production group. After six decades as a member, the emirates decided it was time to act independently and have departed, leading to predictions that they would immediately begin increasing production. Currently, they are only increasing exports, and significantly so.

Reuters reported this week that the UAE exported a record volume of crude oil internationally in June, at an average rate of 3.7 million barrels per day, according to data from Kpler. Vortexa calculated even higher export volumes, reaching up to 4 million barrels per day last month.

"This increase can be attributed to several factors, including the resumption of flows through the Strait of Hormuz, helping to free up previously delayed tankers," Johannes Rauball, senior oil analyst at Kpler, told Reuters. "At the same time, we have observed increased supply from the UAE, which we estimate is approaching pre-war levels," he added.

Analysis of UAE Export Situation

However, the Kpler analyst noted that these record volumes are at least partially from oil held in storage during the five months of hostile operations. This implies that volumes could weaken as storage depletes and before actual production increases materialize.

The question this situation raises is one that analysts have been asking for at least five years - has OPEC lost its relevance?

Current OPEC Situation

Based on Kazakhstan's statement that they have no plans to leave OPEC and Iraq's quick reversal after suggesting they might leave OPEC to increase production, the answer, at least for now, is no. But that it has lost some of its influence in the global oil market is a fact, primarily due to the rise of the United States as the world's largest producer.

Interestingly, the UAE has chosen to leave amid this context - the US is a massive competitor capable of ramping up its own production very quickly, as evidenced by the recent record set in May of nearly 14 million barrels per day.

Impact on Oil Prices

All of this means continued downward pressure on oil prices, which is not something any producer, whether American, Emirati, or indeed OPEC, desires. Global benchmarks have returned to pre-war levels, thanks to record US production and all reports of tanker traffic recovering in Hormuz.

One wonders how far major non-OPEC companies will allow prices to fall before they act.

Author: Irina Slav for Oilprice.com