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OPEC hopes to salvage a deal from Saudi-UAE standoff with a few days of oil diplomacy


Ministers hope to regroup by Dec. 3 meeting

Saudi Arabia favors 3-month extension of oil cuts

UAE wants tighter enforcement of quotas

  • Author
  • Herman Wang
  • Editor
  • Alisdair Bowles
  • Commodity
  • Oil
  • Topic
  • OPEC+ Oil Output Cuts

London — OPEC is hoping a couple of days away from the market's glare will allow cooler heads to prevail and rescue a deal to extend production cuts that analysts say is needed to prevent an oil glut in the months ahead.

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Disagreements – at times vehement, according to sources – between Saudi Arabia and the UAE over how quotas will be managed and enforced led to a breakdown of formal OPEC talks on Nov. 30, and a meeting with Russia and other partners scheduled for Dec. 1 has now been pushed back by two days.

Informal phone calls between some ministers have been arranged, but delegates have been mum on whether any progress towards a détente was being made.

"It's all behind the scenes," one told S&P Global Platts.


The outcome will set the tone for oil prices in 2021, as a coronavirus vaccine may not be widely available until late in the year and growing infections in western countries continue to batter the global economy.

The 22-country OPEC+ alliance, which controls roughly half of the world's crude production capacity, is deciding whether to keep in place its collective 7.7 million b/d output cuts to shepherd the oil market's recovery from the pandemic, instead of scaling them back to 5.8 million b/d in January as planned.

OPEC delegates said the framework of a three-month extension favored by kingpin Saudi Arabia and several other members had been reached. But a deal has been held up by the UAE's insistence that quota-busting countries be held to account with so-called "compensation cuts" that have to date been largely unenforced, except on itself.

Iraq, cash-strapped and politically fractured, owes some 610,000 b/d in cumulative compensation cuts for overproduction between May and October, according to internal OPEC+ analysis seen by Platts. Russia is the second-largest violator, with 530,000 b/d of excess production.

Iraq has said it cannot afford deeper cuts and has long complained that the alliance should take into account its impoverished economy and give it a more generous quota, instead of the current deal's "one size fits all" approach that calls for every country to cut production by 19% from November 2008 levels.

Russia, meanwhile, has been let off the hook by Saudi Arabia despite energy minister Prince Abdulaziz bin Salman's pointed criticisms of other members for their transgressions. Russia's value to OPEC in lending weight to the alliance as one of the world's top two producers appears to outweigh its lax compliance, and delegates said it has proposed allowing quotas to be gradually lifted from January.

Neighborly conflict

In the meeting, Prince Abdulaziz threatened to quit as co-chair of the OPEC+ monitoring committee that adjudicates quota compliance if a three-month extension of the cuts is not agreed – a threat that remains, sources said. Russian energy minister Alexander Novak is the other co-chair.

Officials from Saudi Arabia and the UAE said they had no updates to provide on how talks were going.

The spat reveals a growing rift between long-time allies and Gulf neighbors Saudi Arabia and UAE, not just in oil policy but also in regional diplomacy, with the UAE normalizing relations with Israel and also ending its support for the Saudi-led war in Yemen, among other hot-button issues.

The OPEC standoff comes as its deep production cuts have helped tighten the oil market and development on coronavirus vaccines continues apace.

Oil prices have risen to eight-month highs in recent weeks, with traders largely shrugging off the rapid revitalization of Libya's oil production by more than 1 million b/d over the past two months.

Consultancy Facts Global Energy said a failure to extend the OPEC+ cuts would revert the market to a surplus in the first quarter, which traditionally sees low crude demand.

"OPEC+ is at risk of shooting itself in the foot again, just as its efforts to constrain output since April were starting to pay off," it said in a note.

Maintaining production discipline will be difficult, it added. The OPEC+ alliance is in the fourth year of its supply cooperation, and the historic cuts enacted this year to combat the pandemic have required significant sacrifice.

"As the oil market continues to recover, insisting countries continue to reduce output will be harder to achieve," the FGE analysts said. "It will be increasingly tempting to relax discipline if prices keep rising."

Waiting for a decision

So far, the market appears to be taking the OPEC+ impasse in stride.

Oil prices have slipped since the meeting postponement was announced but remain some 16% above month-ago levels. Front-month ICE Brent crude was trading at $47.47/b at 1800 GMT.

Most market watchers appear to believe the alliance will patch up its differences and ultimately reach a deal to extend the production cuts. Memories of April's brief price war, when Saudi Arabia and Russia failed to agree on quotas before coming back to the table and negotiating the current agreement, are still fresh in members' minds.

"OPEC+ is highly unlikely to destroy the market in Q1 2021 in any hot-headed maneuver," said Bjorn Schieldrop, chief commodities analyst at SEB. "Instead, it's very likely it will find an acceptable compromise for the market as well as the participants."