Home / Industry / Energy /  OPEC splits at its core, risking deal that underpins oil price

The successful OPEC+ deal that’s supported the oil market since the price crash earlier this year is threatened by a new fissure at the heart of the cartel.

Unusual tensions between Saudi Arabia and the United Arab Emirates -- longtime OPEC stalwarts and close allies -- have prevented what was widely expected to be a routine agreement to delay a production increase scheduled for January. Instead of a deal, a ministerial video conference on Monday delivered nothing to the expectant market, and yielded frustration and recrimination behind closed doors.

Informal talks will continue by phone in the coming days, after OPEC+ gave itself more time to reach a compromise by pushing back its final meeting by two days to Thursday. Behind closed doors, oil diplomats tried to lower the temperature, with delegates saying they should be able to patch up their differences after consultations with their own governments.

Many cartel-watchers also expect a compromise that would see the bulk of the group’s production cuts continue, underpinning the recent rally in crude prices. However, the depth of the split also raises the slim possibility of a more damaging breakdown that could trigger another oil crash.

Instead of a deal, a ministerial video conference on Monday delivered nothing to the expectant market, and yielded frustration and recrimination behind closed doors
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Instead of a deal, a ministerial video conference on Monday delivered nothing to the expectant market, and yielded frustration and recrimination behind closed doors

“The market is underestimating a little bit how serious this is -- this is one of Saudi Arabia’s biggest allies," Amrita Sen, co-founder of consultant Energy Aspects Ltd., told Bloomberg Television. She didn’t predict a messy outcome this week, but sees tensions persisting into next year.

In meetings this week, delegates said the UAE hasn’t overtly opposed the proposal to extend the OPEC+ output cuts at current levels for three months, instead of increasing production in January. But it is effectively blocking an agreement by trying to attach conditions that are almost impossible to meet, they said.

In particular, the delegates said Energy Minister Suhail Al-Mazrouei was asking that countries that have fallen short of exactly 100% compliance with their pledged supply reductions to commit to specific compensation cuts in the coming months -- a non-starter for Russia.

Deeper grievances

This procedural dispute masks the UAE’s deeper problems with the Organization of Petroleum Exporting Countries’ supply restrictions as it implements a long-term strategy to crank up production.

It was in July and August that friction first emerged between the UAE and the Saudis. Abu Dhabi, growing impatient to use its new production capacity, cast aside its usual obedience to cartel discipline and started pumping more crude than its quota allowed. The Saudis were furious, and summoned Al-Mazrouei to Riyadh for a public dressing down.

The UAE soon fell into line, but the resentment remained. The country thinks its quota is unfair, and is keen to make the most of massive investments in production capacity, according to people familiar with its oil policy. It is also planning a new regional price benchmark based around its Murban crude variety, but the big liquid market needed for a successful launch is inhibited by the strictures of the cartel.

The Emiratis’ frustration flared two weeks ago, when officials signaled privately that they were dissatisfied with their quota and were even contemplating leaving OPEC in the long term. Those deeper grievances were on show again in Monday’s meeting when Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman, in what appeared to be a gesture of frustration, told others he may resign as co-chair of a key OPEC+ panel. Al Mazrouei was offered the post, but refused, according to a person familiar with the situation.

“Tensions are running high," said Helima Croft, chief commodities strategist at RBC. “We still believe that the group will probably find some face-saving compromise, with a short extension being the most likely outcome followed by a phased production return. Nonetheless this latest fracas does not bode well for collective cohesion in 2021."

Talks continue

OPEC is no stranger to difficult meetings. The gathering in April that resulted in the current output agreement went on for several days as Mexico haggled over its contribution. That’s nothing compared to some of the meetings the cartel held back in the 1980s, when the group was again struggling to cut output. One round of talks in Geneva ran for 17 days in 1986, and was quickly followed by a 10-day marathon.

Algerian Oil Minister Abdelmadjid Attar, who currently holds the post of OPEC president, told state radio on Tuesday that he’s optimistic the group will be able to reach consensus, and postponing the meeting to Thursday shows willingness to do just that.

Oil prices fell only slightly on Tuesday, giving little indication that traders were anticipating an OPEC+ breakdown on the scale of what occurred in March, when failure to reach a deal resulted in a monthlong price war between Saudi Arabia and Russia.

If this week’s meeting does eventually result in an agreement to postpone the 1.9 million barrel-a-day supply increase current scheduled for January, it may be just what’s needed by a market that’s in recovery but still fragile.

While a breakthrough in vaccines to tackle the coronavirus propelled crude prices to an eight-month high last week, a resurgence in infections has triggered a new wave of lockdowns and inflicted a fresh blow to fuel consumption. The cartel and the wider industry have downgraded their outlooks for 2021, with a picture that’s sharply polarized between recovery in Asia and stagnation in Europe.

“My bet is that they still get the rollover done. But there is a determined push by the UAE to have its voice heard, to rearrange the chairs and thereby undermine Saudi primacy," said Bill Farren-Price, a director at research firm Enverus. “They will be looking at a big dip in prices if they don’t do this."

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