Is OPECs Power Coming to an End?
A bitter infighting between Saudi Arabia and the United Arab Emirates has brought questions about the future of OPEC's energy alliance.
After last week's meetings unexpectedly failed to broker a deal on oil production policy, OPEC and non-OPEC partners abruptly abandoned plans to reconvene on Monday.
Since no agreement has been reached on a possible increase in crude production beyond the end of July, oil markets are in limbo as global fuel demand recovers from the ongoing Coronavirus outbreak.
Helima Croft, head of global commodity strategy at RBC Capital Markets, said that OPEC+ has been thrown its most serious crisis since last year's ill-fated price war between Saudi Arabia and Russia.
Questions about the UAE's commitment to remaining in OPEC will likely grow in the coming days." Back-channel talks are reportedly continuing.
Abu Dhabi "seems intent on stepping outside Saudi Arabia's shadow and charting its own course in global affairs," Croft said of the dispute between the UAE and Saudi Arabia.
Due to the Coronavirus pandemic and a historic fuel demand shock in 2020, OPEC+, which is dominated by Middle Eastern crude producers, agreed to implement massive crude production cuts.
OPEC+ meets monthly to decide on production policies, led by Saudi Arabia, a close ally of the UAE.
Solidarity between OPEC members has disintegrated
The disarray comes after OPEC+ on Friday voted on a proposal to increase oil production by roughly 2 million barrels per day between August and the end of the year in 400,000 barrels per day monthly installments.
However, the UAE rejected the plans, wanting a higher baseline to allow for more domestic production.
In a research note, Tamas Varga, an oil analyst at PVM Oil Associates, said that no agreement was reached and that the OPEC+ alliance will produce at July levels for the rest of the year.
"The [non-] outcome of the meeting changes the supply-demand landscape for the near and far future," he said.
Over the weekend, the UAE and Saudi Arabia engaged in a media blitz to outline their respective positions in a rare public standoff.
Despite being willing to support a short-term increase in oil supply, UAE Minister of Energy and Infrastructure Suhail Al Mazrouei told CNBC the country wants better terms through 2022.
According to a White House spokesperson, President Joe Biden's administration is seeking a "compromise solution." Given their potential impact on crude markets into next year, the U.S., which is not a member of OPEC, has closely monitored the latest round of talks.
According to John Kilduff, a founding partner at Again Capital, OPEC+ was adjourned without a deal on Monday.
The pandemic held them together, and now the post-pandemic is tearing them apart. The UAE is sticking to its guns, wanting to raise its baseline. They want to be able to produce more, he told CNBC via email.
Kilduff noted that the UAE could be the "first domino" to fall.
CNBC reached out to OPEC on Tuesday but did not receive a response.
On Tuesday morning, Brent crude futures were trading at $77.34 a barrel, up 0.2 percent, while West Texas Intermediate futures were trading at $76.36, up around 1.6 percent.
The price of WTI crude reached as high as $76.98 at one point, the highest since November 2014.
With the rollout of COVID-19 vaccines, a gradual easing of lockdown measures, and massive production cuts from OPEC+, oil prices rallied more than 45 percent in the first half of the year.
Capital Economics' Samuel Burman, assistant commodities economist, said OPEC producers will likely increase oil production above quota next month as members "take advantage" of higher oil prices.
Aside from the UAE-Saudi rift, he said Abu Dhabi was probably "somewhat irritated" by Russia's non-compliance with OPEC production quotas.
According to Burman, Russia, a non-OPEC leader, has not introduced any compensatory cuts and is currently overproducing by about 100,000 barrels a day. We believe that this spat involving the UAE increases the chances that the entire agreement falls apart, which would clearly adversely affect our price forecasts in the near future."
