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Signage for the Organization of Petroleum Exporting Countries (File photo)

OPEC+ breakdown: What to watch as the oil crisis evolves

Signage for the Organization of Petroleum Exporting Countries (File photo)

OPEC+ infighting has deprived the oil market of extra supply and sent crude surging to a six-year high in New York.

It’s too early to tell whether the breakdown of the cartel’s meeting on Monday could escalate into a conflict between Saudi Arabia and the United Arab Emirates as bitter and destructive as last year’s price war.

A visitor arrives at the Dubai Financial Market PJSC (DFM) in Dubai, United Arab Emirates, on Tuesday, March 10, 2020. United Arab Emirates ended Monday’s meeting of Organization of Petroleum Exporting Countries and its allies at loggerheads with neighbour with Saudi Arabia.
(Photo: Christopher Pike/Bloomberg)

Here are some key events that could determine the course of the crisis in the coming days:

Price moves

Middle Eastern producers have traditionally signalled their intention to sell larger or smaller volumes of crude through their monthly pricing. Raising the cost indicates less oil, while cutting the price of barrels typically spurs buyers to ask for more.

Saudi Arabia raised its official August selling prices for crude in its main market of Asia on Tuesday. That suggests the kingdom expects the balance between supply and demand to be tighter, as you would expect if OPEC+ members can’t salvage their deal and output next month is maintained at current levels.

In this March 6, 2020 file photo, Prince Abdulaziz bin Salman Al-Saud, minister of energy of Saudi Arabia, arrives for a meeting of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members at the organisation’s headquarters in Vienna, Austria. The OPEC oil cartel led by Saudi Arabia and other allied producing countries resumed talks on Monday, July 5, 2021, amid a standoff with the United Arab Emirates over how much to raise production levels with demand still hampered by threats from new variants of the coronavirus. (Photo: AP/Ronald Zak)

The UAE’s hands are tied on pricing because the cost of its flagship Murban crude is set by trading on an exchange that started this year. One barrel of Murban will cost $72.34 in August.

Open taps

Existing OPEC+ production limits remain in place — as long as members of the group continue to respect them. If Saudi Arabia or the UAE decided to break free of their quotas and open the taps, they could each add at least one million barrels a day to the market, potentially driving down prices.

The increase in Saudi Arabia’s official August selling prices suggests the kingdom isn’t contemplating such a bold move. Another signal will come in a few days, when the kingdom tells its customers how much crude they will be getting next month

The Saudi Aramco processing plant in Saudi Arabia (File photo)

Abu Dhabi already told buyers before the OPEC+ meeting that they’ll be getting less Murban crude than they asked for in August.

External pressure

Former US President Donald Trump played a big part in ending last year’s price war between Saudi Arabia and Russia. He publicly cajoled the two countries back to the negotiating table and helped to unblock talks when Mexico objected to the terms of the deal.

Former US President Donald Trump helped to broker a deal between Saudi Arabia and Russia, ending a trade war that emerged last year.
(Photo: Bloomberg)

The current occupant of the Oval Office has taken a more traditional approach than Trump’s direct intervention, but was nonetheless quick to show the cartel that he is watching events closely. The Administration of President Joe Biden has “been engaged with relevant capitals to urge a compromise solution that will allow proposed production increases to move forward,” a spokesperson said on Monday.

With US oil futures jumping to a six-year high, just below US$77 a barrel on Tuesday, watch out for further signs of American pressure for OPEC+ to get its act together.

President Joe Biden has “been engaged with relevant capitals to urge a compromise solution that will allow proposed production increases to move forward”. (Photo:AP/Andrew Harnik)

Quiet diplomacy

Other members of the OPEC+ coalition haven’t given up on a deal. Iraq’s Oil Minister Ihsan Abdul Jabbar said on Monday that he hopes to “witness a date” within the next 10 days for another meeting. The group should still be able to find a deal that satisfies everyone, he said.

The country with the greatest incentive to bring its allies back to the table is also one of the most powerful members of the coalition — Russia. Its companies are keen to boost output in August, but need several weeks notice to do so. Rising domestic gasoline prices are an issue of growing importance before the parliamentary elections in September.

Moscow’s failure to secure its desired production increase was a rare setback for Deputy Prime Minister Alexander Novak, one of the original architects of the OPEC+ alliance. He made no comment after the cancellation of Monday’s meeting, so watch for any signals that he is still working to salvage something.

Air war

The split between Saudi Arabia and the UAE has been unusually personal and public. Previous disputes between the countries were resolved behind closed doors, but this time around their energy ministers were communicating through rival TV interviews.

If the rift continues to play out in full view of the world, that could be a sign of further escalation.

For Neil Quilliam, association fellow with the Middle East and North Africa programme at Chatham House, “We can expect things to get worse before they better. And that means the UAE raising the spectre of leaving OPEC unless its minimum requirements are met.”