OPEC met last Friday in order to discuss production cuts, but it doesn’t look like an agreement will be reached. Russia and Saudi Arabia want to see sustained production cuts to show the world that they’re committed to their pledges, but the UAE wants to produce more oil as soon as possible. The group needs unanimous approval, so the UAE’s decision could be a major roadblock.
Production Cuts so Far
Last year OPEC+ reduced their production to support prices in an attempt to rebalance supply and demand issues introduced by the Pandemic. The OPEC+ group came to an agreement to cut the collective cartel output by 9.7 million barrels a day. This is just shy of 10% of 2019 demand and was instrumental in rebalancing worldwide supply and demand. Since then, there have been various meetings with respect to compliance and the easing of production cuts.
The July 1st Meeting
An OPEC meeting was held where main topic revolved around relaxing the production cuts. As of now, Russia and Saudi Arabia want to see sustained production cuts through 2022, but the UAE wants to produce more oil as soon as possible. It is not clear whether there will be an agreement or not, but it seems unlikely at least for now as the meeting reached no definitive conclusion, and another meeting with major Russian oil producers was rescheduled. WTI prices jumped to nearly $77 per barrel on the news, but quickly fell.
The disagreements between Riyadh and Abu Dhabi over geopolitical and economic issues seem to establish the basis for the stalemate on production cuts. The crown prince of UAE, Mohamed bin Zayed Al Nahyan, has been investing heavily in output capacity in order to produce more oil now in order to dodge the estimated demand decreases that will come with the energy transition. Saudi Arabia’s crown prince, Mohamed bin Salman, seems to buy into a long-term strategy that sees sustained demand well into the future. The two princes used to be on much better terms following a 2015 camping trip, but disagreements regarding conflicts in Yemen and Israel continue to drive the two diplomats further and further apart. At the moment, it seems that the UAE has no plans to appease the wishes of OPEC members looking to lengthen production cuts into next year.
The chance of the UAE getting its way increases every day. Until an agreement is reached, the UAE will produce more oil regardless, and Saudi Arabia’s reputation of holding the cartel together becomes more and more damaged. It seems that the UAE has stepped out of the shadow of Saudi and now stands face to face in a Middle Eastern standoff that could shake OPEC’s control of markets.