Most of OPEC’s members have budgets that rely heavily on oil income—oil income that has been reduced by the falling oil prices, and then again by their required production cuts in an effort to rebalance the oversupplied market and hold prices at acceptable levels. And although OPEC would mostly deny that the latter is their goal, there is little distinction there.
On Friday, rumors surfaced that the UAE was contemplating the pros and cons of their OPEC membership.
While it has not officially announced a decision, or even officially announced that it was considering backing out of the group, the UAE is said to be having discussions internally about its OPEC cooperation, according to Energy Intel.
The first sign that supports the notion that the UAE may be dissatisfied with its membership came on Tuesday when the UAE suggested to the group that all members should first comply with their existing production quotas before even considering an extension of those cuts, according to Energy Intel.
But there’s more. The UAE officials, who have spoken privately, are also asking the question of whether their OPEC membership is in the country’s long-term interest, given the sour outlook for oil demand and their need to monetize oil resources to avoid stranded assets, Energy Intel said.
Some in the UAE also believe, as does Russia, that the OPEC production cuts lift oil prices enough to encourage US shale—a fierce and resilient competitor. This idea was also behind the collapse of the last OPEC deal in March when Russia and Saudi Arabia flooded the market with oil after Russia refused to get on board with more cuts.
Of course, these private considerations could merely indicate that the UAE is jockeying for a better deal from OPEC regarding the production cuts.
But the alliance is clearly fragile, and the proof is the collapse of the deal earlier this year. If the UAE were to break ranks, others would surely follow.
For now, OPEC is mostly being held together by the work of Russia and Saudi Arabia. But that, too, is a thing of the past. Saudi Arabia now has grievances with non-compliant members after carrying their water for more than a year by cutting more production to keep the group’s compliance near acceptable levels.
Saudi Arabia has indicated that it will no longer perform this duty for the group and has flipped to a more resolute stance that holds each OPEC member to their production cuts, and vowing not to curb its own production more to offset those (Iraq) who fail to reach their production cut demands.
These developments raise worrisome questions about the fragility of the OPEC+ alliance. The Technical meeting ended without agreeing on a course to be recommended for the full meeting on November 30 and December 1. This is the first sign that the upcoming meeting, tasked with setting the production goals for 2021, will be difficult.
And if March is any indication, the collapse of the deal could mean that the world will again be flooded with oil, with each OPEC+ member trying to regain any market share they lost during the strict production cut agreement.
