On Friday evening, oil prices went down sharply: the media reported that the United Arab Emirates (UAE) wants to leave the cartel of oil-exporting countries (OPEC). However, a rebuttal later came out and futures on “black gold” began to trade in the green zone. How did the UAE crash oil prices?

How does the UAE influence oil prices?

How does the UAE influence oil prices? The Organization of Petroleum Exporting Countries was established in September 1960; initially it consisted of five states (Iran, Iraq, Kuwait, Saudi Arabia and Venezuela). Now it consists of 13 countries. Saudi Arabia has the largest production volume (12.5 percent of the world market), and the UAE has four.

Why did the announcement of the withdrawal of one of the oil-producing countries have such an impact on the behavior of the players? The fact is that the Emirates, having abandoned the obligation to limit production, can quickly increase oil production with their existing capacities. And the greater the supply, the less demand and, consequently, the price. The second factor is a reduction of the cartel’s share in world output: not all oil-producing countries are members of the organization, and Russia and the United States, for example, are not. 

Dangerous “+”

The key point is not whether the UAE will withdraw from OPEC. But whether that country will withdraw from the OPEC+ arrangements, because as such there is no classic association of oil-exporting countries right now. Right now OPEC is not a functioning body of influence on the market; we have to fear the collapse of the OPEC+ deal.

The OPEC+ oil production reduction deal was formed in November 2016 due to the discontent of many producing countries with low prices on the market. In this format, ten more countries, including Russia with a share of 14 percent of global production, joined the first group of countries in discussing the volume of crude production to stabilize prices.

The organization of exporting countries would not be able to control the volume of production of crude oil without the agreement with the ten more players, because it does not have a blocking share of the market. To have a significant impact on prices, the organization must greatly reduce production, the expert explained. And if we consider that the largest player in this block is not the UAE, but Saudi Arabia, it turns out that the Saudis should rise and then reduce their production to influence prices by dozens of percent.

Earlier, we reported that oil prices were rising after the news about the withdrawal of the UAE from OPEC was disproved.