OPEC+ Impasse: a severe collective blow to producers, consumers and investors - in the long run!

 

OPEC+ spat between UAE and Saudi Arabia

In retrospect, the oil spat between the UAE and Saudi Arabia laid bare something we had been suspecting for long: oil production – or supply – cuts had been grudgingly brought about by the members of the OPEC+ despite the apparent connotations of unity stemming from a common front.  

More often than not, it was Prince Abdulaziz bin Salman, the Saudi Energy Minister, who was at the forefront in defending the moves by the OPEC+, especially when it came to curtailing the production in order to maintain the price of crude oil.

Not only did he use to exercise caution about the ‘health’ of the sector, but also rushed to point out the ‘sacrifices’ made by the Kingdom to achieve the desired goal – its own voluntary production cuts, perhaps to set an example to the rest of the OPEC+.

Judging by the news that comes in dribs and drabs, it is clear that the baseline issue has not just been a problem for the UAE; a few other members have also raised the same issue with regard to individual country-specific baselines – and got a patient hearing, behind the closed doors, of course.

The UAE says it did not get a fair response from the OPEC+ to its own grievances.

The baseline is a production level from which the cuts are calculated. As for the UAE, this has been 3.16 million bpd; it wants the latter to be raised to 3.8 million bbd, something that both Russia and Saudi Arabia opposed to.

If agreed, the UAE is prepared to extend the production cuts beyond the current deadline – April, 2022 – to December, 2022, while agreeing to increase the OPEC+ productions by 400,000 bpd to ease off the supply constraint and maintain the price of crude oil at a sustainable level.

The fact that the talks reached a deadlock on Monday clearly shows that internal discussions to resolve the issue have not worked.

Analysts believe that only the US can bring together the two factions, which are at the loggerheads, to facilitate the process of hammering out a deal. So far, the US appears to be a passive spectator.

The rising oil price, however, may compel the Biden administration to take a more proactive role in the unpredictable oil equation.

The rare spat between the most influential Arabic nations in the Middle East reflects something that has been simmering in the cauldron of regional politics for some time: getting into the stampede to diversify their oil-dependent economies, the two countries are following diverging paths at the expense of warm relations that existed for decades.

The moves against the UAE by the Saudis in retaliation in the aftermath of the collapsed talks could just make matters worse, not just for the countries in question, but also for the whole region – and of course, the OPEC+.

Saudi Arabia did fall out with a few countries in recent times: Turkey, Qatar and India, to name but a few. On a positive note, it, however, takes the initiative to offer the olive branch after a certain period of time and then move on as if nothing happened.

Although the economic measures taken against the UAE are harsh, the Saudis may reverse these decisions in due course too, when the mutual damage to both countries on many fronts becomes clear.

For that to come about, more often than not, there had been a catalyst, though. The US is the only country that can provide the two nations with what they desperately need right now.

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