Opec and its allies failed to reach an agreement on raising oil production on Friday as talks hit a deadlock for a second day, with the UAE remaining opposed to a deal that does not address concerns over its own output target.
As oil prices traded close to the highest level in three years, around $76 a barrel, the White House flagged the impact of the ongoing rally on US motorists as the global economy rebounds from the initial hit from the pandemic.
The Opec+ group said it would reconvene by videoconference on Monday at 3pm Vienna time, with the meeting likely to be closely watched given rising concerns about inflation across markets.
“The next few days may show how much diplomatic capital the White House wants to extend to prevent triple-digit oil prices,” said Helima Croft at RBC Capital Markets, echoing warnings that crude will probably climb if the group cannot agree to add more production to the market.
Saudi Arabia and Russia had proposed increasing production cautiously by 400,000 barrels each month between August and December, which other countries have broadly supported. They also sought to extend a supply deal among Opec+ producers beyond next April, when it was set to expire, into the latter half of 2022.
But since Thursday the UAE has objected to the prolonging of any deal without re-evaluating its own production allocation, saying that its quota set under the original supply-cut agreement — at the height of the coronavirus crisis in April 2020 — did not account for its maximum output capabilities.
UAE officials have privately felt they have lost out on production revenues by being asked to cut proportionally more than Saudi Arabia, exposing mounting tensions between two traditional Gulf allies.
“The breakdown over which production baseline to use for the supply cuts and the broader risk of the UAE potentially leaving Opec would have seemed unthinkable 72 hours ago,” Croft added. She said the UAE’s push for higher output came after it launched a crude oil benchmark earlier this year. “One wonders whether [that was when] the die was cast,” Croft said.
As some of the world’s biggest listed oil companies retreat from the fossil fuel businesses, Sultan Al Jaber, head of the Abu Dhabi National Oil Company, has been unapologetic about expanding the UAE’s output capabilities.
“We will not leave any opportunity unturned,” he told the Financial Times in an interview. “We are continuing exploration programmes, identifying proven reserves, increasing production.”
As discussions between ministers dragged on into Friday, raising the prospect of a further escalation in oil prices, the White House said there was “absolutely” a concern about the knock-on impact on regular US consumers at the pump.
Traders have questioned whether the relatively modest production increases proposed would be enough to stop prices continuing to rise and allay fears about inflation. But the absence of any output increase, should talks fail to reach a solution on Monday, would probably propel them higher.
The Opec+ group signed up to record cuts of 10m b/d last year to offset a collapse in oil demand as governments imposed lockdowns and travel bans to curb the spread of the coronavirus.
Producers have since slowly released more barrels back on to the market, with cuts currently standing at just below 6m b/d, as they seek to balance an oil demand rebound with persistent uncertainties linked to the virus.
Opec delegates are worried about Covid-19 variants spreading globally while also keeping a close eye on a rebound in production from Iran as talks continue with the US about lifting sanctions on its exports.
Some analysts believe that Saudi Arabia wants a slightly higher price both to boost revenues into government coffers and to encourage more long-term investment in the industry, fearing that the market could face shortages in the coming years.
The kingdom does not want to see genuine shortages that could trigger a huge surge in prices, believing it would accelerate the shift towards renewable energy at a time when it is still heavily dependent on oil revenues.
The latest split has also raised questions over the relationship between Saudi Arabia and the UAE, which was for a long time among the most powerful alliances within Opec. It was arguably weakened by Russia being introduced when the wider Opec+ group formed in 2016.
Last year, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman chastised some members for producing above their target quota even though he was sitting next to his UAE counterpart Suhail Al Mazrouei, knowing that its Gulf peer was one of the countries with elevated output.
Bill Farren-Price, a longtime Opec-watcher and analyst at Enverus, said that some of the strain in the UAE’s relationship with Saudi Arabia probably went beyond differing views on the Opec+ deal. “While they remain closely linked I don’t think they necessarily share quite the same strategic interests any more and may not want to be quite so closely tied,” Farren-Price said.
“I think there’s less interest in being associated with a group controlling oil production at a time when they’re strengthening ties in the west, and when they see their long-term oil policy as more about maximising volume ahead of any peak in demand.”
Additional reporting by Lauren Fedor