Yves here. Now that inflation prospects are a big concern among investors and economic commentators, oil prices and therefore OPEC squabbles are in focus too. Recall that in 2008, many experts contend that the runup in commodity prices, and in particular gas rising to over $4 at the pump, helped push overleveraged consumers over the edge. While oil prices are no where near as elevated, they are still up a great deal from their Covid-suppressed levels. That’s enough to stress consumers and businesses that didn’t see it coming.
As predicted, Saudi Arabia and UAE have settled a spat. But when will the next flare up occur? And note the comment at the very end. Oil producers see the Green New Deal as unlikely to go anywhere. They are much more worried about prices getting high enough to revive the US shale industry.
By Dr. Cyril Widdershoven, who holds several advisory positions with international think tanks in the Middle East and energy sectors in the Netherlands, the United Kingdom, and the United States. He held several senior publishing positions in leading energy publications such as Afroil, Middle East Oil and Gas, and North Africa Oil and Gas Magazine Cairo, and he continues to oversee the Mediterranean Energy Political Risk Consultancy. Dr. Widdershoven worked on M&A operations in Egypt, Libya, Sudan, and Iran, he studied the pipeline operations in Libya, Algeria, Nigeria and Turkey, and he assessed risk for institutional investors and banks in Libya, Egypt, Saudi Arabia, Oman and Iraq, all while advising the Dutch government and international organizations on related issues. Originally published at OilPrice
As expected, OPEC leaders Saudi Arabia and UAE have reached a so-called solution to the current export quota conflict. For two weeks, the global oil market was shocked by the strong position taken by Abu Dhabi’s power brokers, which demanded higher baseline production quota. OPEC sources now have stated that both countries have reached a compromise on production.
Even that the first reactions to the so-called agreement which includes a higher base line production level for the UAE are positive, the deal in reality is nothing more than a band aid. Officials in many oil importing nations are hoping that the agreement will help to cool soaring prices.
Reuters reports indicate that Riyadh has agreed to Abu Dhabi’s request to have its baseline production level lifted to 3.65 million barrels per day (bpd) when the current pact expires in April 2022, according to the source. The current baseline for the UAE was around 3.17 million bpd.
With this gesture, Riyadh looks to keep the current OPEC+ agreement in place, while giving room to Abu Dhabi in order to claim a potential win-win situation. However, the higher production baseline will only be implemented in April 2022, and is a long way from the requested 3.8 million bpd at present. Knowing both sides, the first reactions will be positive, indicating a renewal of the Riyadh-Abu Dhabi-Moscow tandem, showing the market that OPEC is not heading towards a possible breakdown or implosion. It also shows that analysts that were expecting Abu Dhabi to leave OPEC were too quick to draw conclusions. Still, the unease about production quota may persist in the UAE, and the conflict could flare up again at the next OPEC+ meeting.
The high-profile clash between Saudi Crown Prince Mohammed bin Salman and Abu Dhabi Crown Prince Mohammed bin Zayed is not over, instead, it’s just been pushed aside for the moment being. For both parties, a more volatile oil (and gas) market is not the goal, as both pursue a stable situation where prices stay at a level that is acceptable for both producers and consumers.
OPEC also wants to continue the overall strong cooperation of the last years, as non-OPEC, especially Russia and FSU countries are starting to become unhappy about production and export levels. Russian companies are for sure willing to up the ante, bringing additional volumes to the market to reap the gains at present. Some other OPEC producers, including Iraq are also unhappy about missing out on higher revenues or market share due to OPEC policies.
Battling COVID-19’s economic impact, high unemployment, and the ongoing threat of energy-transition polices in the EU and OECD, a growing amount of countries want accelerate the monetization of their hydrocarbon resources. The UAE-Saudi spat is only a sign on the wall of future problems within the cartel. Whatever analysts were stating, MBS and MBZ are maybe competing on lots of issues, but oil and gas are still a binding factor for decision making and cooperation. Saudi Arabia also knows that Abu Dhabi’s continues to invest in increasing its production capacity, which it aims to boost to around 5 million bpd by 2030.
The increases in production capacity are likely to become a point of contention within OPEC during the next couple of years. Today, ADNOC Offshore has awarded drilling contracts to Schlumberger, ADNOC Drilling and Halliburton, targeting integrated riggless services across six of ADNOC Offshore’s artificial islands in the Upper Zakum and Satah Al Razboot fields. ADNOC’s investments until 2025 are already set at $122 billion on growth projects, including the ramp-up in oil production capacity to 5 million bpd by 2030 from around 4 million bpd at present.
On the sidelines, OPEC+ is also keeping an eye on U.S. shale developments. Until now, higher oil prices have not significantly boosted shale oil production, but this could change if prices go even higher. Oil prices of $75-80 are high enough for most drillers to commercially produce their reserves.
The last thing OPEC wants is a new wave of U.S. shale oil onto the market. The current market environment, even with a more belligerent Abu Dhabi, is too positive for Arab and Russian producers to destroy. External factors such as the COVID-19 Delta variant and a slowdown in Chinese oil imports is also being assessed. The European Green Deal presented today is still not seen as a major deal breaker, looking at the internal weakness of the European Union and lack of speed of implementation in general. With the global economic recovery picking up pace, and with oil demand on the rise, there is room for more production, but new conflicts within OPEC, and diverging production strategies are on the horizon.