Saudi-UAE standoff persists in OPEC+ negotiations over oil production hike

Gulf neighbors Saudi Arabia and the UAE appear no closer to compromising on an output accord, despite a weekend cooling-off period, as OPEC and its allies prepare to resume high-stakes negotiations.

Ministers from both countries took to the airwaves July 4 to declare their positions, which have not budged. Saudi Arabia wants to tie a series of monthly OPEC+ production increases to lengthening the group's supply management pact through the end of 2022, while the UAE insists that its output target be increased before signing off on the extension.

"We cannot extend the agreement or make a new agreement under the same conditions. We have the sovereign right to negotiate that," UAE energy minister Suhail al-Mazrouei told CNBC, adding that it was "unfair" to maintain his country's reference production level from which its quota is determined, when its output capacity has expanded over the last three years.

Several hours later, Saudi energy minister Prince Abdulaziz bin Salman told the Al-Arabiya network that the UAE was not following OPEC+ procedure in requesting a review of its baseline and that it was isolated in its position. All other members had approved the deal, save the UAE, he said.

"I've been attending OPEC+ meetings for 34 years and have never seen such a demand," Prince Abdulaziz said. "I represent a balanced country that considers the interests of all in its role as president of OPEC+."

The impasse has left an oil market thirsting for crude on tenterhooks since the talks began July 1, with many forecasters warning of a potential price spike if the 23-country alliance does not further unwind its production cuts. The coalition, currently withholding 5.8 million b/d of output, plans to reconvene July 5 at 3 pm Vienna time (1300 GMT).

The stalled deal in question calls for OPEC+ countries to increase production by 400,000 b/d each month starting in August and remain bound to collective market management beyond the original April 2022 expiry through the full year.

Failure to reach a consensus -- all OPEC+ decisions must be unanimous -- would revert the alliance to its existing production agreement, under which output quotas would remain flat at July levels. That would squeeze an already tight market, as global economies continue to recover from the pandemic, boosting oil consumption.

By many estimates, even the mooted production increases would be insufficient in the short-term.

"There is very little doubt that whatever OPEC agrees by way of lessening of the cutbacks, it will surely ... be a fraction of that amount needed to meet demand," said Mike Muller, who heads Asia operations for trading house Vitol, on a Gulf Intelligence webinar.

S&P Global Platts Analytics forecasts global oil demand will rise 8.8 million b/d from June to December.

A pump-at-will price war also cannot be ruled out, if the dispute escalates.

Defining fairness

Under the current deal, each country's baseline production level is determined by what it pumped in October 2018, except for OPEC+ co-leaders Saudi Arabia and Russia, who were given identical 11 million b/d benchmarks.

Quotas are set based on a percentage of those levels.

For the UAE, its baseline is 3.168 million b/d, but it wants that raised to reflect its present production capacity or about 4 million b/d. UAE officials have pointed out that the country has about 35% of its capacity shut in, compared to an average of 22% for other members.

Mazrouei said he is not opposed to the proposed production hikes but wants to decouple the deal's extension and decide that at a later date.

"The UAE believes that the market needs an increase in production and supports an increase from August," its energy ministry said in a statement. "There is plenty of time to review terms for its extension and we see no need for such a condition to be included at this time."

Saudi Arabia maintains the entire package deal must be considered. Monthly 400,000 b/d rises would wipe out the group's remaining 5.8 million b/d in cuts by September, and an extension through December would provide some flexibility if the increases need to be paused due to market conditions or a new Iran nuclear deal.

OPEC+ sources also said the UAE's stance came as a surprise, as it had never raised concerns about its baseline in any previous meeting, and they are wary of creating an opening for other members in search of higher quotas.

"We have made fantastic achievements in 14 months, and it would be shameful for us not to maintain them," Prince Abdulaziz said, referring to the market's steady ascent since it bottomed out.

He added that Saudi Arabia, which has made several unilateral extra production cuts to help prop up the market, had sacrificed the most among the coalition. But he said he had not given up all hope of a deal.

"A bit of rationality and a bit of compromise can save OPEC+," he said.