A disagreement between Saudi Arabia and the United Arab Emirates over oil output policy and quotas has scuttled – for now – a deal by the OPEC+ alliance of OPEC and non-OPEC producers and exposed underlying tensions between the two Gulf Arab allies over a host of diverging regional and domestic policies. That the spat made it into the public domain is a departure from the quiet diplomacy that, under normal circumstances, would have seen differences resolved before they came to a head.
That neither side seemed prepared to compromise after two days of virtual discussions by ministers of the 23-member OPEC+ group on July 1-2 marked a serious escalation. The talks had been due to continue on July 6 but were called off abruptly. The Saudi and Emirati energy ministers set out their positions in a series of television interviews, laying bare the rift that ended in stalemate.
The first day of the virtual OPEC+ meeting seemed to go smoothly with consensus by all members around a proposal to increase oil production by a total 2 million barrels per day in monthly increments from August to December. This would have brought on additional supply to meet a projected rise in demand that both OPEC and the International Energy Agency flagged in their June monthly reports. But the UAE objected to a Saudi proposal for residual cuts amounting to 3.8 mb/d maintained beyond April 2022. UAE Energy Minister Suhail Mohamed Faraj al-Mazrouei said in interviews that he did not oppose the production increase but could not agree to the extension unless production references used to calculate output curbs were reviewed to reflect actual production rather than outdated 2018 figures.
As news reports of the dispute filtered out, oil prices moved higher. On July 5, global benchmark Brent blend futures rose above $77 per barrel, the highest level in nearly three years. They have since fallen back below $75/bbl, which is where they stood at the start of the OPEC+ meeting.
The UAE has a valid argument in seeking a higher and more realistic baseline. The Abu Dhabi National Oil Company has invested billions of dollars to boost oil production capacity, which now stands above 4 mb/d. It wants the baseline raised from 3.168 mb/d to the UAE’s April 2020 production at 3.841 mb/d. The UAE’s pro rata share of the cut would be smaller if based on a higher baseline. ADNOC is targeting a further capacity increase to 5 mb/d by 2030 and is reluctant to idle a large volume of its oil while demand lasts before it inevitably peaks in the decades ahead. It also recently launched its Murban crude, which makes up half of its total production, as a Middle East price benchmark and the curbs would erode liquidity needed for its success.
What was surprising about the dispute was the involvement of two allies that had grown closer, partly on the strength of a personal relationship between Saudi Crown Prince Mohammed bin Salman and Abu Dhabi Crown Prince Mohammed bin Zayed al-Nahyan, de facto rulers of their respective countries. The two states have seemed to be drifting in opposite directions since the UAE withdrew troops from Yemen, Saudi Arabia opened a channel of communication with Iran, and the UAE established diplomatic relations with Israel. The Saudis’ move to resolve the boycott with Qatar in January also seemed to have initially wrong-footed their Emirati allies. Still more tensions have emerged in recent months as Riyadh began challenging the UAE’s dominance as the region’s financial and trade hub. While the energy ministers were locked in the argument over OPEC+ policy, Saudi Arabia suspended flights to the UAE, citing rising cases of the Delta variant of the coronavirus there. The Saudi government followed the flight ban with an announcement of new import rules for goods from Gulf Cooperation Council states, though the UAE appeared to be the target. It said Saudi Arabia would exclude goods made in free zones or using Israeli input from preferential tariff concessions, both of which would apply to the UAE.
The Aramco Trading Company is now asking suppliers of fuel oil to Saudi Arabia to declare if the cargoes originate in free zones like the UAE’s Fujairah, according to Argus Media. Aramco also has storage facilities at Fujairah, which lies outside the Strait of Hormuz and is one of the world’s biggest bunkering and storage terminals. It isn’t yet clear how this will impact Aramco’s own operations out of Fujairah.
Because both countries are close allies of the United States, the White House deemed the fallout from the dispute significant enough to warrant intervention. In a July 6 press briefing, the White House press secretary, Jen Psaki, said that the United States is closely monitoring the OPEC+ talks and has “had a number of high-level conversations with officials in Saudi Arabia, the UAE, and other relevant partners.” She continued, “We’re encouraged by the ongoing conversation by OPEC members to reaching an agreement … which will promote access to affordable and reliable energy.”
No further OPEC+ meetings have been scheduled although this does not preclude some type of mediation taking place behind the scenes to resolve the dispute between two key members. U.S. intervention is not unusual when its mediation can contribute to oil market stability. As one of the world’s biggest oil producers, any disruption in the global market has a direct impact on U.S. producers in the shale oil patch and conventional oil basins. Former President Donald J. Trump was involved in the discussions that led to the April 2020 OPEC+ accord after U.S. oil prices fell into negative territory as Russia and Saudi Arabia flooded the market in a battle for market share at the height of the first wave of the coronavirus pandemic.
OPEC’s Vienna Secretariat provided no additional information. It issued a terse statement on July 5 saying the 18th OPEC and non-OPEC ministerial meeting had been called off. It added that the decision was made after consultations between Saudi Minister of Energy Prince Abdulaziz bin Salman and Russian Deputy Minister Alexander Novak, chair and co-chair respectively of the OPEC+ ministerial meetings. The Saudi-Russian axis has been an irritant to some members of the group because of concessions Moscow has been able to extract from Saudi Arabia as a price for its continued cooperation.
In interviews after the second day of inconclusive talks, Mazrouei said that the baseline used to calculate the OPEC+ cuts was unfair to the UAE because it did not account for its higher production while two members were given double-digit baselines, in an obvious reference to Saudi Arabia and Russia, which were granted a baseline of 11 mb/d each. “For us in UAE, it wasn’t a good deal,” Mazrouei said in an interview with CNBC on July 5. He said that the UAE “sacrificed the most” in the agreement in terms of comparing current capacity with the level of production. The UAE backed the production increase but not the extension, he added, and said a solution would be to “segregate” the two proposals.
Prince Abdulaziz, in an interview with Saudi-owned Al Arabiya television, insisted the two proposals could not be separated saying the extension was “the basis and not a secondary issue.” The market needed clear messages and stability, he said. “You have to balance addressing the current market situation with maintaining the ability to react to future developments … if everyone wants to raise production then there has to be an extension,” he said.
There had been a visible improvement in market fundamentals as a result of supply restraint by the OPEC+ and Saudi voluntary cuts, yet there were still unknown factors that could upset market balance, he said, referring to the new strain of the coronavirus and uncertainty over future supply increments from Iran and Venezuela, which are currently exempt from the production cut agreement. In an interview with Bloomberg television, he said he was saddened that it had come to this whereby it was “the whole group versus one country” though he did not mention the UAE by name.
When OPEC and non-OPEC producers led by Russia formed an informal alliance to manage the oil market five years ago, few observers expected that it would survive in the face of political and economic disparities among the 23 oil producers. But cohesion has held fast and the level of compliance by members bound by a succession of output curbs agreed upon by OPEC+ has been high despite some overproduction by a minority of participants. “Big efforts were made over the past 14 months that provided fantastic results and it would be a shame not to maintain those achievements,” Prince Abdulaziz told Al Arabiya. “Some compromise and some rationality is what will save us,” he said.
Neither was on display when the OPEC+ deal, which was close to being within reach, collapsed. The agreement would have served the interests of all constituents; now consumers are left at the mercy of market volatility and higher energy bills.