While early reactions to the so-called deal which includes a higher baseline level of production for the UAE are positive, the deal is actually nothing more than a band-aid. Officials in many oil-importing countries hope the deal will help curb the price hike.
Reuters reports indicate that Riyadh has accepted Abu Dhabi’s request to raise its benchmark production level to 3.65 million barrels per day (bpd) when the current pact expires in April 2022, according to the source. The current benchmark for the UAE was around 3.17 million barrels per day.
With this gesture, Riyadh seeks to keep the current OPEC + agreement in place, while leaving room for Abu Dhabi to claim a potentially win-win situation. However, the higher production benchmark will not be implemented until April 2022 and is far from the 3.8 million bpd currently requested. Knowing both sides, the first reactions will be positive, indicating a revival of the Riyadh-Abu Dhabi-Moscow tandem, showing the market that OPEC is not heading towards a possible rupture or implosion. It also shows that analysts who expected Abu Dhabi to leave OPEC were too quick to draw conclusions. Still, unease over production quotas could persist in the UAE and the conflict could resume at the next OPEC + meeting.
The high-profile clash between Saudi Crown Prince Mohammed bin Salman and Abu Dhabi Crown Prince Mohammed bin Zayed is not over, rather it has been put aside for now. For both parties, a more volatile oil (and gas) market is not the goal, as both pursue a stable situation where prices remain at an acceptable level for producers and consumers.
OPEC is also keen to continue the strong overall cooperation of recent years, as non-OPEC countries, especially Russia and countries of the former USSR, begin to be unhappy with production and export levels. . Russian companies are certainly ready to increase the stake, bringing additional volumes to the market to reap the gains at the present time. Some other OPEC producers, including Iraq, are also unhappy about missing out on higher revenues or market shares due to OPEC policies.
Faced with the economic impact of COVID-19, high unemployment and the persistent threat of energy transition policies in the EU and the OECD, a growing number of countries wish to accelerate the monetization of their hydrocarbon resources. The conflict between the UAE and Saudi Arabia is just a sign on the wall of future problems within the cartel. Whatever analysts say, MBS and MBZ may be in competition on many issues, but oil and gas remains a constraining factor for decision-making and cooperation. Saudi Arabia also knows that Abu Dhabi continues to invest in increasing its production capacity, which it aims to increase to around 5 million barrels per day by 2030.
Related: Oil Stabilizes After Saudi-UAE Compromise Removes Major Uncertainty
Increasing production capacity is likely to become a point of contention within OPEC over the next two years. Today, ADNOC Offshore has drilling contracts awarded at Schlumberger, ADNOC Drilling and Halliburton, targeting unmanned integrated services on six of ADNOC Offshore’s artificial islands in the Upper Zakum and Satah Al Razboot fields. ADNOC’s investments through 2025 are already set at $ 122 billion on growth projects, including ramping up oil production capacity to 5 million bpd by 2030 from around 4 million bpd currently.
On the sidelines, OPEC + is also monitoring developments in the American shale. So far, rising oil prices have not significantly boosted shale oil production, but that could change if prices rise even higher. Oil prices of $ 75 to $ 80 are high enough for most drillers to commercially produce their reserves.
The last thing OPEC wants is a new wave of American shale oil on the market. The current market environment, even with a more belligerent Abu Dhabi, is too positive for Arab and Russian producers to destroy. External factors such as the COVID-19 Delta variant and a slowdown in Chinese oil imports are also being assessed. The European green agreement presented today is still not seen as a major break, given the internal weakness of the European Union and the lack of speed of implementation in general. As the global economic recovery accelerates and the demand for oil increases, there is room for more production, but new conflicts within OPEC and divergent production strategies are looming. ‘horizon.
By Cyril Widdershoven for Oilprice.com
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