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Saudi oil supremacy confronted by UAE's rejection of unconditional obedience

The leadership of the de facto leader of the Organization of Petroleum Exporting Countries (OPEC), Saudi Arabia, has been shaken with a revolt on output quotas from a relatively smaller producer of the group, the United Arab Emirates (UAE), causing the cancellation of Monday’s meeting and a rift in the cartel.

After postponing the ministerial meeting twice last week, the OPEC+ group called off Monday’s meeting without setting a new date, as member countries failed to reach an agreement on an oil production policy from August onward.

The disagreement among member countries arose after the UAE raised an objection to the group’s proposal to increase the output by 400,000 barrels per day (bpd) from August to December. The group also wants to extend its production cut agreement, which was originally signed in October 2018, from April 2022 to December 2022.

However, the UAE only approved the production rise and extension of the deal on the condition that the deal would be based on an increase in its production baseline from the 2018 level of around 3.2 bpd.

While some member countries want to increase their production to benefit more from higher oil prices, the majority of the OPEC+ group wants to thread carefully by gradually increasing production to avoid flooding the market with surplus barrels given the demand uncertainty ahead of the autumn shoulder season.

Moreover, possible delays in coronavirus vaccination campaigns, new restrictions in some countries, and the emergence of COVID-19 variants are adding to fears of the slow pace of the oil demand recovery, forcing the cartel to be even more cautious with its insistence of a “one-size-fits-all” approach.

However, the UAE, which had previously considered leaving the group, has now expressed its disquiet about the outdated output baseline that the country thinks is unfair because it currently has the capacity to produce more than the original agreement that was struck in October 2018.

This major division has made it impossible for the OPEC+ group to make a collective decision.

Demand for higher production growth will not be limited by UAE

The current problem between the cartel and the UAE is quota based amid strained relations between Saudi Arabia and the UAE, Fereydoun Barkeshli, chairman of the Vienna Energy Research Group (VERG), told Anadolu Agency.

He explained that the UAE does not agree that the current quotas, which are based on adjustments defined and agreed in 2018, should remain in place.

Because of the 1 million barrels of additional capacity the country has built up from the huge investments it has recently made, Barkeshli said it is demanding a new quota baseline.

Saudi Arabia, on the other hand, thinks it made the biggest sacrifice in 2018 when OPEC and non-OPEC production was cut back, and based on the 2018 quota base, all the additional demand from the market goes to Saudi Arabia, which they believe they deserve, he said.

“In a way, both countries have some valid points,” Barkeshli said, stressing that this move could prompt a revolt from other member countries that are also in favor of higher production levels.

“Iraq will be next, Kuwait and Iran too. Kazakhstan is also demanding a higher quota,” he said.

Saudi kingdom’s oil supremacy faces challenge

According to Barkeshli, Saudi Arabia’s leadership was challenged by the UAE, and this could lead to further confrontations.

“Perhaps, a different minister other than Prince Abdulaziz bin Salman would have been punished by the Saudi government as oil is the critical line for the Kingdom. Nothing must challenge Saudi Arabia when it comes to oil supremacy. Saudi Arabia’s oil supremacy must be preserved and now the UAE has penetrated that forbidden territory,” Barkeshli said, warning that more challenges may follow.

Given the sensitivity of the oil market, Barkeshli stressed the need for leadership from OPEC+.

“Now, OPEC+ did not provide a sense of direction. The market wants stability and sustainability, which did not come from this OPEC+ conference,” he said.

300,000 barrels of spare capacity gives UAE leverage

The UAE has invested heavily in oil production compared to other countries, said Randall Mohammed, a financial representative of US-based Northwestern Mutual.

He said the UAE plans to use oil revenues from increasing its daily oil output to 5 million barrels this decade to further diversify its economy, and to this end has pushed for a higher baseline.

He said the cartel’s insistence on a collective production quota was in vain as members like the UAE are unwilling to comply.

Mohammed said the UAE does not want to get stuck with low production quotas, as it is one of the few countries that has a spare capacity of 300,000 bpd, giving it leverage.

“I suppose when one really thinks about it, where does the OPEC+ draw the line? Is it prudent to allow one member to stall the decision?” Mohammed asked.

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