The United Arab Emirates (UAE) and Saudi Arabia last week, clashed over how the Organization of Petroleum Exporting Countries and allies (OPEC+) producers will unwind oil output cuts. The OPEC+ members were scheduled to meet today but the meeting failed to hold indicating rising tension among members. This has left the oil market to face much tighter supplies than had been expected, causing prices to soar to new highs.
Several days of tense talks failed to resolve a bitter dispute between Saudi Arabia and the United Arab Emirates, delegates said, asking not to be named because the information wasn’t public. In the absence of an agreement, the cartel’s current production limits will remain in place, depriving the global economy of vital extra supplies as demand recovers rapidly from the coronavirus pandemic.
Oil futures bulls have taken the market. U.S oil, WTI futures is up 1.42%, trading at $76.24 a barrel while Brent oil futures is trading at $77.12 a barrel, up 1.23% for the day, as of the time of writing this report.
Why the clash?
OPEC+ ministers clashed last week when the UAE rejected a proposed eight-month extension to output cuts. The UAE, according to sources, on Friday went along with Saudi Arabia and other OPEC+ members on a proposal to raise output in stages by about 2 million BPD from August to December but rejected extending remaining cuts to the end of 2022 from the current end date of April.
The UAE is upset about the baseline from which its production cuts are being calculated and wants it raised. Abu Dhabi has invested billions of dollars to increase its production capacity and says its baseline was set too low when OPEC+ originally forged their pact.
The UAE is not alone in requesting a higher baseline as countries like Azerbaijan, Kazakhstan, Kuwait and Nigeria had requested and received new ones since the deal was first agreed last year.
What to expect
The outcome is a significant failure for the cartel. Relations have soured between two core members of the OPEC+ to such an extent that no compromise was possible. It damages the group’s self-image as a responsible steward of the oil market, raising the likelihood of a further inflationary price spike.
There is a possibility that the OPEC+ deal could fall apart. This would mean that individual producers could then unilaterally hike output in a race to recover market share. Although this is a very unlikely scenario as the current deal is valid until the end of April 2022, the possibility cannot be completely ruled out considering the current situation.
