OPEC+ struggles to clinch deal on oil quotas as UAE standoff continues

The UAE remains at loggerheads with the rest of its OPEC+ counterparts after two days of talks, as a deal for the alliance to continue a gradual increase of production to meet growing global oil demand hangs in the balance.

Ministers adjourned their online proceedings late July 2, agreeing to take the weekend to regroup and reconvene July 5 at 3 pm Vienna time (1300 GMT).

All members of the coalition, save the UAE, appear to have endorsed a plan to boost collective crude output by 400,000 b/d each month from August to December and extend their supply management agreement through the end of 2022. But the UAE is insisting its baseline production level from which its quota is determined should be raised, which other countries has said is unfair, delegates told S&P Global Platts on the condition of anonymity.

"This gives us a couple of days hoping that the UAE will come to the table with the consensus," one delegate said, describing the situation as "extremely frustrating for everybody."

All OPEC+ agreements require unanimous approval.

The dust-up threatens to unravel a coalition that has cooperated since 2017 on reining in output to prop up the oil market, including a historic 9.7 million b/d cut during the worst of the pandemic-induced crash in mid-2020 that has been gradually unwound.

The producer group has been under heavy pressure to keep rolling back its cuts and cool a market that has steadily risen in tandem with the global economy's emergence from the pandemic.

S&P Global Platts assessed Dated Brent at $77.62/b on July 2, its highest since October 2018.

The White House, which under President Joe Biden has largely left OPEC+ to its own devices, in contrast to his more activist predecessor Donald Trump, even weighed in with its concerns over high gasoline prices as the talks were in progress, with press secretary Jen Psaki noting the alliance's substantial spare production capacity.

As it is, the proposed 400,000 b/d monthly production increases would likely still leave the market tight through at least the end of the summer driving season, before autumn refinery maintenances ease demand pressures.

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

A potential nuclear deal between Washington and Tehran that relieves sanctions on Iranian oil sales could later throw the market into surplus, a prospect delegates say they remain wary of.

Baseline debate

The UAE's stance has reopened old wounds within the coalition, as the Gulf member, which invested heavily in expanding its output capacity in recent years, has often chafed against how OPEC+ quotas are managed and apportioned. It has even questioned its continuing membership in the organization, Platts previously reported.

Sources said the UAE was on board with the production increases through December but did not feel the supply pact should be extended through the end of 2022 without a revised baseline.

Saudi Arabia had pushed for the extension to give the market more assurance that OPEC and its allies are committed to managing production through the pandemic recovery.

The UAE's baseline under the current pact, determined by its October 2018 production level, is 3.168 million b/d, but the country now claims a capacity closer to 4 million b/d.

Using a figure closer to that as its new benchmark, perhaps its April 2020 record production of 3.84 million b/d, would allow the country to pump significantly more crude while remaining compliant with a higher quota, and also give it a leg up if Iran gains US sanctions relief.

Many of the UAE's crude and condensate grades compete against Iranian ones of similar specs.

Saudi Arabia and Russia, along with several other countries, said providing the UAE with this boost would be unfair and open a Pandora's box for other members eager to pump more to agitate for their own baseline increases.