Oil Prices Decline as UAE Announces Exit from OPEC Amid Iran War Energy Crisis
Asian stocks mostly advanced on Wednesday despite losses on Wall Street, while oil prices fell after the United Arab Emirates said it would leave the Organisation of the Petroleum Exporting Countries (OPEC), delivering a blow to the powerful oil cartel.
US futures edged higher. Markets in Japan were closed for a holiday. In South Korea, the Kospi rose 0.3 per cent to 6,657.40, while the Hang Seng in Hong Kong gained 1.4 per cent to 26,029.02. The Shanghai Composite index traded 0.3 per cent higher at 4,091.01. Australia’s S&P/ASX 200 slipped 0.3 per cent to 8,689.50. Taiwan’s Taiex lost 0.6 per cent, and India's Sensex gained 0.4 per cent.
Oil Market Reaction
The price of a barrel of Brent crude oil for June delivery fell 0.5 per cent to $110.71 early Wednesday. Brent for July delivery dropped 0.6 per cent to $103.74. Before the war began in late February, Brent oil was around $70 per barrel. Benchmark US crude fell 0.6 per cent to $99.32 a barrel.
The UAE’s departure from OPEC, scheduled for Friday, has been closely monitored by oil markets. OPEC accounts for roughly 40 per cent of global oil output, and the UAE is one of its largest producers. The UAE has pushed back against OPEC production quotas in recent years, seeking to sell more oil globally.
“The UAE’s exit will increase (oil) output,” ING Bank strategists Warren Patterson and Ewa Manthey wrote in a research note on Wednesday. “The UAE has been increasingly frustrated over recent years by its output being constrained by OPEC production quotas, which have kept it well below its potential.”
However, analysts noted that short-term impacts on oil prices will still depend mainly on prospects for reopening the Strait of Hormuz, where roughly one-fifth of the world’s oil passed before the war, as US-Iran negotiations for a permanent end to the Iran war stalled and the waterway remained largely closed.
The UAE was the third largest oil producer within OPEC before the Iran war. ING stated that its departure “will reduce OPEC’s effectiveness in managing and influencing the global oil market through supply measures.”
Geopolitical Context
Investors are awaiting more updates on US-Iran peace talks, although limited progress has been made. Iran has offered to reopen the Strait of Hormuz if the United States lifts its blockade on its ports. So far, the US appears to rule out a deal that excludes the Islamic Republic’s nuclear programme.
The Federal Reserve is expected to announce a decision on interest rates later Wednesday.
Wall Street Retreat
On Tuesday, Wall Street retreated from its recent record highs. The benchmark S&P 500 fell 0.5 per cent from its latest all-time high to 7,138.80. The Dow Jones Industrial Average edged down 0.1 per cent to 49,141.93, and the technology-heavy Nasdaq composite dropped 0.9 per cent to 24,663.80.
Artificial intelligence-related stocks led the losses. Chip company Broadcom lost 4.4 per cent, Nvidia fell 1.6 per cent, and Micron Technology lost 3.9 per cent. Alphabet, Amazon, Microsoft, and Meta Platforms are reporting quarterly results on Wednesday.
In other dealings early Wednesday, the US dollar rose slightly to 159.63 Japanese yen from 159.62 yen. The euro was trading at $1.1708, down from $1.1712. The yield on the US 10-year Treasury remained at 4.35 per cent.
