UAE: UAE oil output falls at the sharpest post-pandemic pace in March
Latest reading: Brent crude oil prices averaged USD 99.41 per barrel in March, up 43.2% from February. On 31 March, the commodity traded at USD 118.35 per barrel, up 63.1% from 27 February.
Turning to production, the UAE’s oil output fell to 1.89 million barrels per day (mbpd) in March, down 35.6% year on year (February: 3.42 mbpd, up 15.8% yoy), the sharpest decline since May 2020 at the start of the pandemic, as the Iran war damaged oil and logistics infrastructure and prevented exports via the Strait of Hormuz. The fall was less sharp than that seen in Kuwait and likely Bahrain and Qatar, with the UAE benefiting from a pipeline to the Gulf of Oman that allows it to bypass the Strait of Hormuz. However, the fall was sharper than that seen in Saudi Arabia, which has even greater capacity to bypass the Strait.
Outlook: The outlook for the UAE’s oil production has been altered by the country’s recent decision to leave OPEC after nearly 60 years of membership. By leaving the cartel, the UAE should be more easily able to ramp up production after the Strait of Hormuz reopens and attain its goal of hiking maximum output to 5 mbpd by 2027.
Still, with the Strait closed, our panel expects the exit to have a limited short-term impact on either the UAE’s oil production or global crude prices. Oil production likely fell sharply again in April, and even if the Strait of Hormuz were to reopen in May, it would take several months before the UAE’s output reached pre-war levels.
Panelist insight: Goldman Sachs’ Adam Cook and Gabriel Hollis commented:
“While the effective closure of the Strait currently constrains UAE production, the exit implies upside risk to our base case that UAE crude production recovers to 3.8mb/d by Oct26 (vs. 3.6mb/d before war), with our Feb26 potential UAE crude production estimate at just over 4½mb/d. Following its exit, the UAE will reportedly continue to act responsibly, bringing additional production to market in a gradual and measured manner, aligned with demand and market conditions. ADNOC—the UAE national producer—aims to raise production capacity to 5mb/d by 2027.”
On the medium-term implications of the move, ANZ’s Daniel Hynes and Soni Kumari said:
“In the medium term, the UAE’s exit from OPEC is unlikely to translate into a step-change in global supply, despite perceptions of substantial unused capacity. Prior to late February’s escalation of the Middle East conflict, the UAE’s crude output was running at around 3.6mb/d, close to effective operating levels under the OPEC+ framework. Even under a scenario where the UAE is fully unconstrained by quotas and able to monetise incremental capacity, we estimate that net additional supply entering the market would be close to 1.0mb/d.”