OPEC’s credibility on the line as factional divides deepen

By Grant Smith, Javier Blas and Salma El Wardany on 12/1/2020
Saudi energy minister Abdulaziz bin Salman
Saudi energy minister Abdulaziz bin Salman

(Bloomberg) --OPEC+ talks were delayed for two days to give ministers more time to reach a deal, after a long and tense meeting on oil production broke down without an agreement.

The move, set out in a letter seen by Bloomberg, was the most dramatic sign yet of the deep division inside the cartel after hours of talks on Monday yielded no result. Oil prices, which have rallied on vaccine hopes as well as expectations that OPEC will maintain its current output curbs, slipped on the news.

OPEC ministers met on Monday and had been scheduled to talk to their non-OPEC partners on Tuesday. At one point, there had appeared to be a consensus building between ministers yesterday, but the meeting then became unusually fraught. Saudi Arabia’s energy minister, in what appeared to be a gesture of frustration, told others he may resign as co-chair of a key OPEC+ panel.

At stake is the credibility of the cartel whose actions have underpinned the market since the spectacular oil crash earlier this year. The run-up to the meeting saw new cracks emerge in the relationship between the United Arab Emirates -- a core part of the group -- and other members. The UAE’s national long-term strategy to crank up production is clashing with the cartel’s current strictures.

“The market is underestimating a little bit how serious this is -- this is one of Saudi Arabia’s biggest allies,” Amrita Sen, co-founder of consultant Energy Aspects Ltd., told Bloomberg Television. She doesn’t predict a messy outcome this week, but sees tensions persisting into next year. “Despite the disputes, they will get through this one.”

Informal talks are expected to continue by phone before the OPEC+ meeting on Thursday. Ministers are discussing whether to increase production in January as planned or maintain the current level cuts -- in one scenario for another three months.

Some members think the market is still too fragile to accept more barrels, while others want to make the most of rising prices to increase production and bolster revenue.

The UAE isn’t overtly opposing an extension of the current output cuts, but is effectively blocking an agreement by trying to attach conditions to a rollover that are almost impossible to meet, according to delegates. The UAE is calling on those who have previously breached their quotas to commit to full compliance before making a deal.

In another sign of the building tension, the UAE was offered the position of co-chair of the OPEC+ monitoring committee that the Saudis may give up, but rejected it, according to a person familiar with the situation.

“There are going to have to be some concessions made to the UAE and to other producers who are concerned about this compliance burden,” Bob McNally, president of Rapidan Energy Advisors, told Bloomberg Television. That could mean a short extension and then a gradual increase in production, a change in output limits, or a stronger compliance mechanism.

It was earlier this year that friction first emerged between the UAE and the Saudis, traditionally stalwart partners. Abu Dhabi had grown impatient to use its new production capacity, while also planning to launch a regional oil benchmark contract that would be helped by a large liquid market.

“They do need liquidity ahead of it,” Sen said of the so-called Murban futures contract. “That’s a big driver.”

In the summer, the UAE cast aside its usual obedience to cartel discipline and started pumping more crude than its quota allowed. The Saudis were furious, and summoned Energy Minister Suhail Al-Mazrouei to Riyadh for a public dressing down.

The UAE soon fell into line, but the resentment remained. The country thinks its quota is unfair, and is keen to make the most of massive investments in production capacity. Those ambitions are held back by the rules of the cartel.

The Emiratis’ frustration flared two weeks ago, when officials signaled privately that they were dissatisfied with the quota assigned to them by the Organization of Petroleum Exporting Countries, and were even contemplating leaving the organization in the long term.

This week’s meeting -- and the decisions on output -- are a follow-up to the vast production cuts made during the depths of the pandemic. The alliance had planned to ease some of those curbs at the start of 2021, in anticipation of a global economic recovery.

Over the past few weeks, leading figures in the alliance such as Saudi Energy Minister Prince Abdulaziz bin Salman and Russian Deputy Prime Minister Alexander Novak have signaled support for changing the current plan because the market is still fragile.

While a breakthrough in vaccines to tackle the coronavirus propelled oil prices to an eight-month high, a resurgence in infections has triggered a new wave of lockdowns and inflicted a fresh blow to fuel consumption. The cartel and the wider industry have downgraded their outlooks for 2021, with a picture that’s sharply polarized between recovery in Asia and stagnation in Europe.

OPEC is no stranger to difficult meetings. The gathering in April that resulted in the current output agreement went on for several days as Mexico haggled over its contribution. But that’s nothing compared to some of the meetings the cartel held back in the 1980s, when the group was again struggling to cut output. One round of talks in Geneva ran for 17 days in 1986, and was quickly followed by a 10-day marathon.

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