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OPEC oil alliance at impasse between Saudi Arabia and UAE
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FILE - In this March 6, 2020 file photo, Prince Abdulaziz bin Salman Al-Saud, Minister of Energy of Saudi Arabia, arrives for a meeting of the Organiz… FILE - In this March 6, 2020 file photo, Prince Abdulaziz bin Salman Al-Saud, Minister of Energy of Saudi Arabia, arrives for a meeting of the Organization of the Petroleum Exporting Countries, OPEC, and non OPEC members at OPEC headquarters in Vienna, Austria. The OPEC oil cartel led by Saudi Arabia and other allied producing countries resumed talks on Monday, July 5, 2021, amid a standoff with the United Arab Emirates over how much to raise production levels with demand still hampered by threats from new variants of the coronavirus. (AP Photo/Ronald Zak, File)
DUBAI, United Arab Emirates (AP) — Talks among members of the OPEC cartel and allied oil producing countries broke off Monday in the midst of a standoff with the United Arab Emirates over production levels.
No new date was set for resuming talks, leaving oil markets in a state of at least temporary uncertainty about future supply as demand for fuel continues to recover from the worst of the coronavirus pandemic.
In an unusual public confrontation with leading cartel member Saudi Arabia, the UAE on Sunday pushed back against the OPEC Plus group, which includes non-OPEC producers like Russia. The UAE said it supported a proposed gradual increase in production favored by Saudi Arabia, the group’s largest producer, and by non-member Russia. But the UAE said it also wanted an increase in its own permitted level of production.
Despite the public clash, oil markets traded only modestly higher Monday. Crude oil rose 1.5% to $76.32 per barrel on the New York Mercantile Exchange, while international Brent crude rose 1.3% to $77.20 per barrel.
There are concerns that if an agreement cannot be reached, the alliance could break apart, potentially triggering a price war and swings in global oil prices at a time of uncertainty over future demand for oil due to continued lockdowns in parts of the world and the uneven distribution of vaccines worldwide.
Last year’s abrupt halt to travel and widespread lockdowns reduced global demand for oil, driving down energy prices as unused barrels of oil quickly filled up storage sites. The OPEC Plus group agreed to a steep cut of some 9 million barrels per day to keep prices from collapsing further. Saudi Arabia went even further, voluntarily cutting even more of its own production to keep prices from falling. In June, the kingdom produced just under 9 million barrels per day, compared to more than 10 million barrels a day before the pandemic.
As economies began rebounding and vaccine distribution picked up steam, the OPEC Plus group increased production so that daily cuts averaged around 6 million barrels per day. Currently, the OPEC Plus alliance is producing some 37 millions barrels per day compared to around 43 million barrels per day in April of last year, at the start of the pandemic.
OPEC Plus has been meeting monthly to decide on adding more production. Yet two days of online talks last week did not produce an agreement. Talks were scheduled to resume Monday, but hours later came an announcement that the session had been called off.
Over the weekend the UAE’s Energy Minister, Suhail al-Mazrouei, spoke to multiple media outlets about his country’s concerns.
On Sunday, the UAE Energy Ministry issued a rare statement, saying that it wants a higher baseline production level of its own that reflects the UAE’s actual production capacity rather than what it said is an outdated reference.
The UAE is currently producing around 2.7 million barrels per day under the OPEC Plus agreement, though it averaged around 3 million a day between January 2019 and March 2020, according to Refinitiv, a financial market data provider. Analysts suggest the country can easily produce up to 4 million a day.
Per Magnus Nysveen, head of analysis at Rystad Energy research and consultancy firm, said for the UAE to get what it wants, Saudi Arabia may need to make further cuts to its output.
“If the UAE were to have a higher quota going forward, it would only be Saudi Arabia that can reduce production on their side,” he said, explaining that the kingdom has done voluntary cuts before and could be willing to concede in order to keep OPEC together.
Still, that could be a hard sell because both countries are in need of oil revenue to buoy their economies, which have been rocked by the pandemic and lower oil prices.
There are political differences between the UAE and Saudi Arabia, as well, to consider.
Saudi Arabia and the UAE were closely aligned in past years, mirroring the budding relationship that had developed between Abu Dhabi Crown Prince Mohammed bin Zayed and Saudi Crown Prince Mohammed bin Salman. So close were the two de-facto leaders that the two countries launched into a war in Yemen and cut ties with neighboring Qatar together. In late 2017, the two nations announced a new partnership to coordinate in all military, political, economic, trade and cultural fields.
But in recent years, national interests have diverged. The UAE dramatically downsized its footprint in the Saudi-led coalition battling Iranian-backed Houthis in Yemen. The Saudis moved to rapidly restore diplomatic ties with Qatar earlier this year, but the UAE has yet to restore full diplomatic relations and continues to block Qatar-based news sites like Al Jazeera.
Meanwhile, Saudi Arabia on Sunday suspended all flights to and from the UAE, lumping it with Ethiopia, Vietnam and Afghanistan as coronavirus risks. The kingdom has expressed concern over the fast-spreading delta variant, which has appeared in the United Arab Emirates.
In recent days, the kingdom changed its law for goods imported from Gulf Arab countries to exclude from a preferential tariff agreement imported goods produced by any Israeli-owned companies, as well as goods with any components produced in Israel. Such products have proliferated in the UAE following the country’s normalization of ties with Israel.
McHugh contributed from Frankfurt, Germany. Associated Press writer Isabel Debre contributed to this report.
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The OPEC+ spat is likely to be resolved ‘sooner rather than later,’ energy analyst says
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OPEC and its allies left the oil market hanging on Monday when they indefinitely postponed talks to resolve a disagreement over production curbs. Crude prices first surged to six-year highs, then retreated, and uncertainty continues to hang over future OPEC+ policy. But at least one energy analyst expects a breakthrough to come soon. “I think it’s highly likely [that] it’s going to resolve itself,” said Stephen Schork, a principal advisor at energy analysis company The Schork Group. OPEC is the strongest it has been in years, and they would not want to “upset the applecart,” he told “Street Signs Asia” on Thursday.
Conflict in OPEC
The energy alliance met last week to discuss output policy, but the UAE unexpectedly blocked proposals to increase supply and extend the remaining production cuts to the end of 2022, instead of April 2022 as previously agreed. Suhail Al Mazrouei, UAE’s energy minister, told CNBC on Sunday that it “wasn’t a good deal” because the output cuts were measured against a baseline of 2018 production levels. The country has increased its production capacity, but cannot pump more oil while the OPEC agreement remains in place. It wants this baseline to be revised.
An OPEC sign hangs outside the OPEC Secretariat in Vienna, Austria, on Nov. 29, 2017. Akos Stiller | Bloomberg | Getty Images
Russia is reportedly attempting to negotiate a resolution. Neil Beveridge, a senior oil analyst at Bernstein, said OPEC policy has been focused on controlling supply to manage prices. But the UAE sees that peak oil demand is “staring OPEC in the face” and is considering chasing market share instead of high energy prices, he told “Capital Connection” on Thursday, and that’s why it wants to be given a higher quota.
$50 oil versus $100 oil
Observers say two scenarios are possible if OPEC doesn’t reach a new deal. The first is that of a price collapse. Beveridge noted that OPEC is sitting on nearly 6 million barrels of spare capacity now. If countries decide to increase supply and go for market share, the downside could be “significant,” he said. “We can see oil prices certainly drop back below $50 again … pretty quickly, if that [happens],” he said.
Why mess around with, potentially, a price war? Stephen Schork The Schork Group
The second scenario is one where countries continue to produce oil according to the quotas that were previously agreed on. Oil prices would spike, possibly as high as $100 per barrel, with demand outpacing supply. OPEC probably doesn’t want to rock the boat in either direction, according to Schork. “They are in a very nice position at this point,” he said. “Why mess around with, potentially, a price war?” On the other hand, too-high oil prices are not ideal. “The higher we go, you’ll start to hear the political winds turn against them, especially here in the United States,” he added.
Schork said he believes the UAE will be allowed to increase production, and the country will stick to their quota. “They just want a bigger share of OPEC’s prize,” he said. Bernstein’s Beveridge, however, said there is a risk that other OPEC+ members will want to raise their production quotas. “That could lead to a whole unravelling of the OPEC agreement that we have … and that would certainly point to very significant downside [for] prices,” he said.