In March last year, oil cartel Opec+ “held a disastrous meeting in which it failed miserably to reach an agreement”, says John Authers on Bloomberg. Oil prices subsequently plunged. This month “Opec+ has held another disastrous meeting in which it failed miserably to reach an agreement”.
The result? Prices have risen. Brent crude oil prices have soared above $77 a barrel, the highest level since October 2018. US oil benchmark WTI briefly hit $76.98 a barrel, a seven-year high.
Saudi Arabia and the UAE fall out
The Opec+ cartel brings together major oil producers such as Saudi Arabia, Russia, Iraq and the United Arab Emirates (UAE). The group controls 50% of global oil output, and tries to keep prices stable. Opec+ found itself “staring into the abyss” last year, says Tom Holland of Gavekal Research.
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A Saudi-Russian price war, combined with Covid-19 lockdowns, saw prices plunge. US futures briefly went below zero. To rescue the market, Opec+ members agreed to cut their joint output by ten million barrels per day (mbpd) compared with pre-pandemic levels (equivalent to roughly 10% of global production).
The group has since eased those curbs, but it is still pumping six mbpd less than it did pre-pandemic. The group had been expected to agree to further output hikes in the months ahead, but talks failed. Markets are betting that supply will thus remain tight and that prices could head towards $100 a barrel.
The quarrel came from an unexpected source. The UAE, traditionally a close ally of Saudi Arabia, has been resisting Saudi plans to keep some production curbs in place through to the end of next year. The UAE says it is only willing to agree if its own production quota can be raised. We have “sacrificed the most, making one-third of our production idle for two years”, energy minister Suhail Al Mazrouei told CNBC.
There is more to the dispute than money, says Al Jazeera. Riyadh and Abu Dhabi are at odds over foreign policy. Saudi economic pressure on Emirati free zones, “areas in which foreign companies can operate under light regulation”, is another bone of contention.
Opec is “sitting pretty”
Traders are getting carried away, says Holland. The two Gulf allies may “patch up their disagreement” before too long. With prices surging, other Opec members will also be more tempted to cheat on their agreements and pump extra oil on the sly.
Opec’s “purpose is to get as much money as it can for its oil”, adds Authers. Disharmony in the group should really mean cheaper oil. A more quarrelsome Opec means oil markets may be more volatile, but “it would be risky to bet… that this meeting” heralds much higher oil prices.
Don’t bet on a price plunge either though, says George Hay on Breakingviews. The market is likely to remain in deficit until the end of 2022 thanks to “surging crude consumption”. High prices are also not tempting US shale producers into the market as before: “Climate change and profitability concerns are deterring listed oil groups from ramping up output.” For all the “squabbling”, Opec is “sitting pretty”.
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