UAE-Saudi brinkmanship threatens Opec unity as oil prices soar

So sour are Saudi-Emirati relations that neither side could agree on how Monday’s private discussions concluded between Opec members and allies.

People close to the United Arab Emirates said a formal meeting of oil ministers had been postponed. Their Saudi Arabian counterparts argued it had been cancelled and blamed the UAE for torpedoing a deal to raise output at a time when resurgent demand has already pushed up crude prices by 50 per cent this year.

Brent, the international benchmark, reached a three-year high on Tuesday as the disagreement between Saudi Arabia, Opec’s de facto leader, and the UAE, a close, previously co-operative partner, triggered a briefing war between the two camps.

The clash has opened a rift at the heart of Opec that threatens the ability of the cartel — and its partners in the Opec+ alliance — to deliver oil market stability and could yet see the UAE, a member since 1967, leave the group.

There is growing unanimity among Emirati officials surrounding de facto leader Sheikh Mohammed bin Zayed al-Nahyan that it could be in the UAE’s best interests to go it alone, people briefed on the situation said.

“Discussions are very much ongoing — but quitting is still very much the nuclear option,” said one of the people. “There are plenty of steps to go through until we get there.”

Under de facto leader Sheikh Mohammed bin Zayed al-Nahyan, the UAE wants to generate increased revenues from oil production and petrochemicals in order to fund future diversification efforts © Bandar Algaloud/Courtesy of Saudi Royal Court/Handout

Withdrawing from Opec — a once impossible thought — would allow the UAE to boost its low-cost production as part of an output maximisation drive, rather than operating at two-thirds of its capacity to comply with the cartel’s production quotas.

Saudi Arabia and its chief ally in the 23-member Opec+ group, Russia, had proposed increasing production by 400,000 barrels a day each month between August and December. But they had also pushed to extend the existing supply deal — agreed at the height of the pandemic-related lockdowns in April 2020 — beyond its April 2022 end date.

The UAE argued in the past week that while it supported the proposed output increase, it wanted an assurance — ahead of any extension of the underlying supply agreement — that its baseline production on which the supply cuts are based would be lifted from April 2022 to account for its higher output capacity.

The UAE has raised production capacity in recent years to close to 4m b/d and envisions a further increase to 5m b/d, under a plan spearheaded by Sultan Al Jaber, head of the Abu Dhabi National Oil Company, who is keen to seek out any opportunity to expand the country’s energy capabilities. Under the current Opec+ agreement, it is allowed to produce just over 2.7m b/d in July.

Pumping as much oil as quickly as possible is seen as the key to securing Abu Dhabi’s post-oil future. “They want to put out the message that it is do or die,” said one consultant to the UAE government.

The extra output is planned for refinery and petrochemical plants in the city of Ruwais, part of Abu Dhabi’s plan to generate more value from the emirate’s crude oil domestically. Higher revenues would fund oil-diversification plans across the economy.

For now, Riyadh has refused to blink in the face of Emirati brinkmanship and will seek to blame Abu Dhabi for rising prices.

One person familiar with Saudi Arabia’s oil policy said the UAE’s refusal to “engage positively” had resulted in a missed opportunity to rein in crude prices that were now primed to rise further when fewer barrels were released on to the market than traders expected. “This meeting could have been over in one hour on Thursday,” the person said.

The Borouge 3 petrochemical plant is one of several facilities in Ruwais that could process increased oil output in the UAE © Christophe Viseux/Bloomberg

The last time the Opec+ alliance came under this much pressure was at the start of the pandemic when Saudi Arabia and Russia launched a price war after a dispute over how to handle supply policy in the face of the crisis.

Now, rather than a spat between long-term rival producers, the kingdom is at loggerheads with a close neighbour that has become more assertive and less willing to handle disagreements in private, threatening the fragile unity of the Opec+ group.

“What we learn from this episode is that there is less patience for the sort of closed-door diplomacy that would have resolved these problems in the past,” said Bill Farren-Price, a director at the research firm Enverus and longtime Opec watcher.

“Cooler heads may well prevail — but the genie is out of the bottle. The prospect of a major Opec producer flying solo cannot easily be discounted,” he added. “The impact of a schism like this on Opec credibility, to say nothing of Opec, is profound.”

Kristin Diwan, a senior resident scholar at the Arab Gulf States Institute in Washington, said the UAE might not leave immediately, but the logic of its oil policy and strategic trajectory suggested that eventually it would.

“There is a compromise that could be found in the short-term, but I don’t see the Emiratis surrendering a strategy that they have been building upon for half a decade at least,” she said. “Their whole oil transition depends upon them using their resources faster.”

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