OPEC and its allies failed to reach an agreement on increasing oil production on Friday because the negotiations were deadlocked for the second day in a row, and the UAE still opposed an agreement that did not address its own production targets.
With oil prices approaching their highest level in three years, around US$76 per barrel, and as the global economy rebounded from the initial blow of the pandemic, the White House pointed to the impact of the continued rebound on American motorists.
OPEC+ Group stated that it will reconvene the meeting via video conference at 3 pm Vienna time on Monday. In view of the growing concerns about inflation in the entire market, the meeting may be closely watched.
Helima Croft of Royal Bank of Canada Capital Markets said: “The next few days may show how much diplomatic capital the White House hopes to provide to prevent oil prices from rising,” he warned in response that if the group cannot agree to increase production, crude oil may climb to the market.
Saudi Arabia and Russia have cautiously proposed to increase production by 400,000 barrels per day from August to December, and other countries generally support it. They also seek to extend the supply agreement between OPEC and oil-producing countries to expire in April next year and to the second half of 2022.
But since Thursday, the UAE has been opposed to extending any agreement without reassessing its own production allocation, saying that its quota set under the original production reduction agreement – at the peak of the coronavirus crisis in April 2020 – Did not consider its maximum output capacity.
UAE officials privately believe that they are required to cut proportionally more production income than Saudi Arabia, which exposes the growing tension between the two traditional Gulf allies.
Croft added: “72 hours ago, the breakdown of the production baseline used to cut supply and the broader risk that the UAE might leave OPEC seemed unimaginable.” She said that the UAE launched crude oil earlier this year. Only after the benchmark did it push to increase production. “Someone wants to know if [that was when] The mold has been cast,” Croft said.
As some of the world’s largest listed oil companies exit the fossil fuel business, Sultan JaberThe head of the Abu Dhabi National Oil Company has been unapologetic for expanding the output capacity of the UAE.
“We will not let go of any opportunities,” he said in an interview with the Financial Times. “We are continuing our exploration plan to determine proven reserves and increase production.”
As discussions between ministers dragged on to Friday, increasing the possibility of further increases in oil prices, the White House stated that it was “absolutely” worried about having a knock-on effect on ordinary American consumers at gas stations.
Traders questioned whether the proposed relatively modest increase in production would be sufficient to stop prices from continuing to rise and ease concerns about inflation. But if Monday’s negotiations fail to reach a settlement, and production does not increase, it may push them higher.
OPEC+ Group signed a record 10 million barrels/day production cut agreement last year to offset the plunge in oil demand caused by the government’s lockdown and travel ban to curb the spread of the coronavirus.
Since then, producers have slowly released more oil to the market, and the current output cut is slightly less than 6 million barrels per day, as they seek to balance the rebound in oil demand with the ongoing uncertainty associated with the virus.
OPEC representatives are concerned about the spread of Covid-19 variants around the world, and at the same time pay close attention to the rebound in Iranian production, as they continue to negotiate with the United States to lift sanctions on its exports.
Some analysts believe that Saudi Arabia wants slightly higher prices to increase the revenue of the government’s treasury and encourage more long-term investment in the industry, worrying that the market may face shortages in the next few years.
Saudi Arabia does not want to see a real shortage that could trigger a sharp increase in prices, believing that it will accelerate its transition to renewable energy while it is still heavily dependent on oil revenues.
The recent split has also raised questions about the relationship between Saudi Arabia and the UAE, which has long been one of the most powerful alliances within OPEC. When the broader OPEC+ group was established in 2016, Russia was introduced, which arguably weakened it.
Last year, although Prince Abdulaziz bin Salman, the Minister of Energy of Saudi Arabia, sat next to UAE Minister of Energy Suhail Al Mazrouei, he still penalized some member states for exceeding the target quota because he knew Its Gulf counterparts are among the countries that have increased production.
Enverus long-term OPEC observer and analyst Bill Fallon Price said that some of the tensions in the relationship between the UAE and Saudi Arabia may extend beyond different views on the OPEC+ agreement. “Although they stay in close contact, I don’t think they have exactly the same strategic interests anymore, and may not want to be so closely connected,” Farren-Price said.
“I think that as they strengthen their ties with the West, and when they believe that their long-term oil policy is more about maximizing production before demand reaches any peak, there is not much interest in connecting with groups that control oil production.”
Additional reporting by Lauren Fedor