OPEC Realignment: What UAE's Growing Power Means For Oil Markets

OPEC and OPEC+ are still very likely to reach an agreement on oil production rates for the first three months of 2021. While they work on the deal, the events of the past few days reveal that a larger realignment is taking place within both organizations that could have implications for the oil market for years to come.

The disagreements appear to be centered on two issues. The first: how OPEC can compel member countries that have overproduced their quotas to compensate for that overproduction in the future.

The second: whether OPEC+ should roll over its current production levels for the first three months of 2021, or if it should implement a scheme to gradually increase production over those three months.

Since OPEC's inception, noncompliance has been a habitual problem. Most recently, Saudi Arabia led efforts to try to fix this issue. In the last few months, countries that failed to sufficiently cut oil production faced pressure to commit to a schedule of additional production cuts to compensate for their earlier lack of compliance.

This measure may have helped the oil market regain some confidence in OPEC and OPEC+ over the summer, after the group’s disastrous March meeting led to an oil price collapse. However, the push for compliance and responsibility among members was only partially successful, as some countries, like Iraq, still failed to adhere. Other overproducing countries, like Russia, were never even pressured to get in line.

According to breaking away from the group, it is very unlikely that the UAE will actually make such a significant move. This leaked information is probably part of a larger power play in the global energy arena.

The UAE has been asserting its independence in the Gulf region for some time—most notably in issues of diplomacy and nuclear development. The UAE engaged in nuclear diplomacy with the United States and international organizations so it could build its first nuclear power reactor.

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It recently signed a historic agreement to normalize relations with Israel and is set to receive coveted fighter jets from the U.S. based on this new cooperation. Already, economic cooperation between the UAE and Israel is commencing. In other words, the UAE is striking a bold place for itself on regional issues, which makes sense given its relative economic strength and its cosmopolitan cities that host thousands of foreign travelers and professionals.

As a quiet supporter and negotiator on behalf of Saudi policies in OPEC, the UAE played an influential, though understated role, in putting together the first Declaration of Cooperation with Russia and other countries to form the OPEC+ group in 2016. Often, the UAE offers a reliable vote for positions favored by Saudi Arabia. The relationship may still be significant, but the UAE is an independent OPEC member.

The UAE’s new assertiveness within OPEC should be seen as a component of its overall political and diplomatic confidence. Rather than looking to go rogue from OPEC, the UAE is seizing what it sees as an opportunity to gain power and influence by leading where others, including Saudi Arabia, have been unable.

Recall that the UAE’s push within OPEC comes just days after its oil company, ADNOC, selling billions of dollars in international bonds to fulfill its dividend commitments.

The UAE’s oil minister, Suhail Mazroui, has long such as BP, have expressed corporate positions that oil demand has peaked. However, the UAE does not espouse this view, and it is positioning itself to be a global leader in the oil industry in the future. By foregoing the peak demand theory and continuing with substantial CAPEX plans, ADNOC could position itself as a leader in coming years.

Meanwhile, according to reports, Saudi oil minister Abdulaziz bin Salman threatened to resign his co-chairmanship of the JMMC committee in frustration with other country’s persistent over-production. This may just be a threat, but it raises the issue of whether Saudi Arabia needs to be a co-chairman. Meanwhile, some members, notably the UAE, are showing more independence and strength.

Market watchers will need to take note if the UAE is able to capitalize on this period of relative weakness within the traditional OPEC and OPEC+ leadership. Saudi Arabia will always be a critical producer in the market because of the sheer volume of its production capacity and exports. If Saudi Arabia wanted, it could flood the market by ramping up to 12 million bpd as it did in April, and it expects to increase capacity to 13 million bpd in the near future. Comparatively, the UAE produces only 2.5 million bpd right now, it has a capacity of 4 million bpd. If it succeeds in expanding that to 5 million bpd, it will become the second-largest producer in OPEC, and the third-largest in OPEC+ behind Russia. Yet, production capacity is not everything in a cartel that requires coalition building to reach consensus.

What positions will the UAE likely pursue with more power in OPEC and OPEC+?

First, it seems the UAE is keen to continue high rates of production, as opposed to Saudi Arabia, which would like production cuts. The UAE wants to increase its capacity and appears to want to sell more. Also, with its new nuclear power plant, the UAE will be able to export more of the oil it does produce.

Second, the UAE has a more diversified economy than some other oil producers. Though the local economy has seen recent struggles, particularly in real estate, the UAE economy boasts successful industries in finance, tourism, business services and general international trade.

Oil is a component of the UAE economy, but the country does not rely on high prices like Saudi Arabia’s government does. And, for its size, the country’s economy is stronger than Russia’s. In other words, an empowered UAE is freer to make wise, long-term decisions within OPEC+ without as much concern for the price of oil tomorrow. That might mean that traders could see less of OPEC+ trying to push up the price of oil right away.

Written By: Ellen Wald