UAE leaving OPEC? A storm in an oil barrel
The oil world was abuzz at the end of last week on speculation that the UAE might be on the verge of pulling out of the Organization of Petroleum Exporting Countries (OPEC). It was an entertaining sideshow to the heavyweight meetings of the OPEC+ ministerial committee that monitors output and compliance earlier in the week, but ultimately seems likely to amount to little more than a storm in an oil barrel.
Reports that Abu Dhabi was considering withdrawal from OPEC, of which it was a founding member, were based on unattributed briefings from anonymous officials, but were reported by reputable media organizations, so you have to assume there was something substantial behind the lurid headlines of disputes, escalations and tensions.
According to the reports, withdrawal from OPEC was one of a series of scenarios being considered by the UAE as the organization pondered whether to press ahead with supply increases in January, as it committed to do in the historic April cuts agreement credited with getting the global oil market out of the biggest hole in its history.
The theory was that the UAE was becoming tired of having its supply constrained by the OPEC deal. As one of the lowest-cost producers in OPEC, it had a better chance of maximizing its revenue and satisfying strategic national interests outside the deal. No time frame was mentioned, and — it should be stressed — withdrawal was only one possibility under consideration, and certainly not a done deal.
There was circumstantial evidence to back up the theory. Over the summer, the UAE had missed complying with its OPEC+ limits, saying it had to increase production largely to meet domestic demand, and mildly ticked off the OPEC+ hierarchy for doing so.
In response, the UAE reaffirmed its commitments to the OPEC+ deal, and pledged to compensate for the overproduction. UAE Minister of Energy Suhail Al-Mazrouei appeared in Riyadh alongside Saudi counterpart Prince Abdul Aziz Bin Salman, who is also co-chairman of the ministerial committee, in a demonstration of OPEC+ unity.
After the stories of a UAE withdrawal appeared, Al-Mazrouei again pledged UAE allegiance to OPEC, emphasizing its role as a “reliable and long-standing member” which had always been “open and transparent” in its deal with OPEC — therefore unlikely to be organizing a backdoor exit.
Some energy experts labeled the reports as exaggerated, even untrue, but that is to ignore the plain fact that somebody in a senior position within the UAE energy infrastructure was talking to journalists about the possibility of a UAE withdrawal, even at a very hypothetical level.
Other oil analysts thought that it was “unthinkable” that the UAE would leave OPEC, pointing out that to do so would cause great harm to the organization and, by extension, the global energy markets upon which the UAE depends, along with all other members of OPEC+.
These calmer voices also produced what they regarded as irrefutable proof that the UAE would remain committed to OPEC: The oil markets themselves apparently did not believe talk of a UAE withdrawal, judging by the sharp jump in crude prices in the days after the speculation surfaced.
Brent crude was trading back above $45 a barrel at the end of last week, despite the stories about OPEC’s demise and the biggerthan-expected supply from Libya. The traders do not appear to believe there is anything as cataclysmic as an OPEC breakup in the offing. It is true that OPEC+ faces a critical few weeks. Whether or not to increase supply from January is a crucial decision that will determine the health or otherwise of oil markets as they move into recovery mode in 2021 on the back of COVID-19 vaccines and a resulting economic rebound.
But it seems very unlikely that the energy policymakers of Saudi Arabia and Russia, the two leading forces within the OPEC+ alliance, will also have to deal with any imminent threat to the organization’s unity from the UAE.