Saudi-UAE OPEC+ disagreement tests their relationship
OPEC+ has failed to reach an agreement on tapering and extending its deal because the UAE is arguing for the right to produce more in line with its capacity. This dispute has focused attention on broader divergences between the UAE and its close ally Saudi Arabia. However, we expect a compromise deal, and the Saudi-UAE relationship, while more complex than in recent years, remains solid.
The UAE’s argument
The UAE has an understandable case because Adnoc’s investments have boosted capacity substantially during the four and a half years since OPEC+ production constraints were introduced, meaning that it is bearing much deeper cuts than other members. The current cuts are based on an October 2018 baseline (with a few individual modifications) and have tapered to -14% below that level, from a peak of -23% in May 2020. However, output in October 2018, when the group was already nearly two years into cuts but had briefly eased pressure on compliance to offset the loss of supply from Iran due to renewed US sanctions, wasn’t evenly indicative of capacity. It’s hard to be sure what the countries’ true sustainable production capacities are, as these figures are negotiating chips with each other and the market, but output in April last year, when OPEC+ cooperation briefly collapsed owing to Saudi-Russian disagreements, gives some sense of what they might be. The UAE produced 3.84m b/d in April 2020, according to OPEC’s “secondary sources”, which means its allocated output this month, 2.74m b/d, is -29% below that level (see graph). This is a considerably deeper cut than for other countries, including Saudi Arabia (-18%) and far below Russia (-9%). Moreover, the UAE itself claimed to have produced even more that month – just over 4.0m b/d – which would make the current cuts -32% below capacity. The UAE is also frustrated that whereas it has largely complied with the cuts, Russia, with a much more generous allocation and periodic special treatment, has frequently overproduced and has failed to even provide a plan to compensate for past undercompliance, in the way that Iraq and others have done.
At the same time, most other OPEC+ members have suffered far more economically than the UAE from last year’s oil crash and Covid and would benefit much more from a hike in capacity...
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