Complex Made Simple

OPEC saves the day, but will the oil production compromise satisfy the UAE long term?

They agreed to disagree and then, at the 11th hour, after days of delays, OPEC+ reached an agreement.

January 2021 will start with 500,000 additional barrels of crude on the market and everyone wins, or do they?

Aiming to please with gradual ease

Following its January output increase decision, OPEC will hold monthly consultations to decide on the next steps.

Before this week, expectations had been that the group would hold off putting more oil onto the fragile market for another three months.

But the compromise deal avoided a breakdown of OPEC+ unity, which had become a growing risk after days of tense talks exposed a new split between core cartel members, the United Arab Emirates, and Saudi Arabia.

Oil rose on news of the deal, with Brent rising toward $50 a barrel on Friday after closing at a nine-month high of $48.71 in the previous session.

Aramco sees higher oil prices. “Oil prices are set to see a meaningful recovery in the second half of next year as the worst for producers, and the market is behind us,” the CEO of Saudi Aramco, said at an industry event this week, as reported by OilPrice.com

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Draining storage by tapering supply add-ons

The revised accord is likely to keep the oil market in deficit throughout the first quarter, according to Bloomberg calculations using OPEC data, meaning bloated inventories will continue to drain. If the group had gone ahead with the full supply hike that was set out in the original deal struck earlier this year, the cartel’s economists had calculated that the market would have flipped into surplus, potentially undermining the recent rally.

“The deal achieves the main goal of Saudi Arabia, namely to prevent crude stocks building during the first quarter,” said Amrita Sen, co-founder of consultant Energy Aspects Ltd.

By delaying, or tapering, the return of supply, OPEC+ hopes to ensure global oil stockpiles fall in Q1, 2021.

The original plan was to add 1.9 million barrels a day from Jan. 1 but now the roll-over sees the same increase delayed until April with tapering starting from January at 500,000 barrels a day, added each month.

The period during which compensation cuts can be made to offset past over-production was extended to the end of March.

Current production cuts are at 7.7 million barrels per day, a deal reached last August after OPEC and allies had cut a record 9.7 million from production in April this year as COVID decimated global travel, industry, and commerce.  

Was everyone satisfied? 

Several members of the group were worried that the market was still too fragile to absorb those extra barrels as a new wave of virus infections hit the global economy. Other nations were impatient to open the taps after months of production restraint that has put their finances under severe pressure.

The intensity of the fight earlier this week between staunch allies Saudi and the UAE took OPEC-watchers by surprise. But Abu Dhabi has been pursuing a more independent oil policy, is investing heavily in production, and wants to pump more. Last month it even signaled it was considering its options outside the group.

The UAE’s resistance at OPEC meetings to extend deep supply cuts into 2021 is the start of a more assertive policy stance for the country and divergence from closely following the Saudi lead and at times, together cut more supply than they had agreed to compensate for other OPEC members who did not reduce as much as they had pledged. 

The UAE told its OPEC+ counterparts inside closed-door meetings this week that even though it would support a rollover of existing cuts, it would struggle to continue with the same deep output reductions into 2021.

UAE officials have told their OPEC+ counterparts that national oil company ADNOC has supply commitments to international oil companies, who are equity partners, and have helped develop its oilfields, the sources said. When the country cuts output, foreign oil firms also have to cut.

Abu Dhabi is cutting around 33% of its output potential, pumping 2.59 million bpd, down from around 3.9 million bpd before the OPEC+ supply cut deal was reached in April, according to OPEC and industry data.

When compared to other OPEC+ members, the data show that the UAE is taking the biggest cuts when compared to its output potential.

ADNOC, meanwhile, had boosted its oil production capacity to over 4 million bpd from around 3.5 million bpd in 2018 and plans to grow it further to 5 million by 2030.

ADNOC also plans to start trading its flagship Murban crude in the first quarter of 2021 regardless of the OPEC+ cut pact.

Abu Dhabi’s ambitions for Murban could complicate its adherence to future deep cuts because it may be harder to convince international investors and traders that the grade can trade freely as a benchmark if Abu Dhabi has to set production levels according to OPEC supply policy.

Riyadh and Abu Dhabi sit on some of the cheapest oil reserves to produce, and the desire to ensure they pump as much as they can before the transition away from fossil fuel reduces the value of the oil.