OPEC is confronting its most severe risk of disintegration in decades as member states depart or threaten to leave, making the prospect of oil prices falling below $50 per barrel a credible threat.
Following the formal withdrawal of the United Arab Emirates from OPEC on May 1, Iraq has threatened to follow suit if it is not granted greater production freedom. Concurrently, a series of geopolitical shocks, including the U.S. seizure of Venezuelan oil assets and military actions by the U.S. and Israel against Iran, have significantly weakened OPEC's ability to manage the market. The international benchmark Brent crude futures, which surged above $115 per barrel in March, have since retreated to around $75, nearing pre-war levels.
Media reports on June 25 highlight a core market concern: if major oil-producing nations abandon their production quotas and compete to increase output, the global crude market could face a supply glut. Robert Yawger, head of energy futures at Mizuho Securities USA, warned that if countries rush to push barrels to market as quickly as possible, prices could "fall precipitously," potentially breaking below $50 per barrel—a level not seen since the COVID-19 pandemic.
Iraq's Exit Threat Deepens OPEC Rifts
As the world's sixth-largest oil producer, Iraq has invested billions in recent years to expand its capacity but remains constrained by OPEC quota rules from fully utilizing it. Yawger notes this mirrors the situation the UAE faced before its exit—the fundamental driver for member discontent is the conflict between massive capacity investment and strict production limits.
While Iraq has not formally withdrawn yet, Yawger stated, "It is not a good sign when an organization that restricts a country's oil production has complaints from within." He anticipates that significant volumes of crude from the UAE, Iraq, and even Saudi Arabia could flood the market in the coming months.
During the past four months of conflict, OPEC has effectively been in a state of "paralysis," with many members unable to supply oil normally due to geopolitical strife. Yawger pointed out that the U.S. has essentially replaced OPEC as the key global swing producer during this period.
The blockade of the Strait of Hormuz is a core variable in this shock. Todd Fowler, head of energy, natural resources, and chemicals at KPMG US, stated, "The blockade of the Strait of Hormuz was the decisive shock—it disrupted global supply flows, prompted the drawdown of strategic reserves, and accelerated efforts by alternative suppliers to fill the gap."
OPEC+ has approved production increases three times this year, but these increments are a drop in the ocean compared to the estimated loss of over one billion barrels of supply from the Persian Gulf during the Iran conflict.
Simultaneously, the U.S. takeover of Venezuelan assets and military actions against Iran have further disrupted OPEC's market management efforts, forcing a few producers like Saudi Arabia, Iraq, and Kuwait to shoulder the primary responsibility for balancing global supply.
Venezuela's dilapidated infrastructure may take years to rebuild, while the Iran conflict has exposed the immediate security vulnerabilities of Gulf oilfields. The UAE's decision to leave OPEC after years of consideration stems from a strategic desire to monetize its resources while they still hold value.
Saudi Arabia's Dilemma: Stabilize the Market or Protect Market Share
Reports indicate that as OPEC's largest producer, Saudi Arabia is clearly troubled by the UAE's departure and Iraq's threats. Yawger noted that OPEC has historically operated as a "unified front," and member defections directly undermine this foundation.
Saudi Arabia's unique advantage lies in its substantial spare capacity, theoretically allowing it to inject an additional 2 million barrels or more of oil into the market "fairly quickly," thereby maintaining some control over the global market—provided its export routes remain open.
However, with the continued loss of members, remaining OPEC countries face a dilemma: either increase production to maintain market share or watch their share be eroded by departing nations like the UAE and Iraq.
Yawger stated that the discontent within OPEC "threatens the cohesion of the entire organization and puts pressure on the willingness of producers to jointly control prices."
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