OPEC Deal on Delaying Output Hike Is Elusive as Tensions Simmer

(Bloomberg) -- OPEC talks ended without an agreement on next year’s oil output, with ministers punting the final decision into a second day of discussions as tensions in the cartel simmered.

The coalition is debating whether to maintain its supply cuts at current levels, or increase output as planned next year. Market-watchers have been expecting a three month delay -- and if the group doesn’t deliver the recent rally in crude prices could be undermined.

At stake also is the credibility of the cartel whose actions have underpinned the market since the spectacular oil crash earlier this year. The run-up to the meeting has seen new cracks emerging in the relationship between the United Arab Emirates -- a core part of the cartel -- and other members.

Saudi Arabia’s Energy Minister Prince Abdulaziz Bin Salman signaled his dissatisfaction with the situation on Monday by telling others he may resign as co-chair of a committee that oversees the OPEC+ deal.

“Tomorrow’s meeting will be tough” but will probably reach a consensus, Iranian Oil Minister Bijan Namdar Zanganeh told the Shana news agency.

After a video conference lasting about four hours, there had been no opposition to the proposed three-month delay, but delegates said there was no consensus about the precise terms of the extension. Still unresolved were questions of members’ compliance with pledged cuts, and compensation from countries that have previously exceeded their supply limits.

Ministers from the Organization of Petroleum Exporting Countries will talk again on Tuesday morning, before further discussions with allies including Russia in the afternoon.

Extending Curbs

The tensions spilled into view on Sunday, when producers held informal discussions. Most of them supported maintaining the existing curbs into the first quarter, but the plan didn’t get backing from two of the coalition’s major players: the UAE and Kazakhstan, delegates said.

Friction has emerged between the UAE and the Saudis, traditionally stalwart partners. Abu Dhabi has grown impatient to use its new production capacity, while also planning to launch a regional oil benchmark contract. The country hasn’t commented publicly on its stance, and officials said before Monday’s meeting that they hadn’t decided on a position.

Kazakhstan is ready to discuss its position, according to a person familiar with the country’s oil policy. The Kazakh Energy Ministry declined to comment.

“I expect that there will be a show of unity tomorrow” and eventually a deal, said Helima Croft, chief commodities strategist at RBC. An OPEC agreement is always “a product of negotiations and consensus,” she said.

If an understanding can’t be achieved, the existing agreement allows members to add 1.9 million barrels a day to world markets, potentially derailing the recent rebound in crude prices. Brent futures are trading near $47 a barrel in London. Crude could fall by about $5 if OPEC+ doesn’t delay the production increase, according to Goldman Sachs Group Inc.

Demand Concerns

OPEC+ made vast production cuts during the depths of the pandemic to offset a historic collapse in fuel demand. The alliance had planned to ease some of those curbs at the start of 2021, in anticipation of a global economic recovery. Over the past few weeks, leading figures in the alliance such as Saudi Prince Abdulaziz and Russian Deputy Prime Minister Alexander Novak have signaled support for tweaking that plan.

While a breakthrough in vaccines to tackle the coronavirus propelled oil prices to an eight-month high, a resurgence in infections has triggered a new wave of lockdowns and inflicted a fresh blow to fuel consumption. The cartel and the wider industry have downgraded their outlooks for 2021, with a picture that’s sharply polarized between recovery in Asia and stagnation in Europe.

In a speech at the meeting’s opening session, Algerian Energy Minister Abdelmadjid Attar, who holds OPEC’s rotating presidency, laid out the reasons for a delay. “We must be aware today that the market conditions of 2020 are likely to continue during the first quarter of 2021,” he said. “We must be cautious.”

Yet Abu Dhabi has so far withheld its blessing for the proposal, with Energy Minister Suhail Al-Mazrouei repeating his position that many countries still haven’t implemented the supply cuts they’ve been obligated to make for months, delegates said.

That may have been a pointed reference to the Saudis’ treatment of the UAE during the summer, when Al-Mazrouei was summoned to Riyadh and given a public rebuke for his own overproduction. The country has since delivered the required compensatory curbs, but other laggards like Iraq and Nigeria haven’t.

The Emirates’ frustration flared two weeks ago, when officials signaled privately that they were dissatisfied with the quota assigned to them by OPEC, and were even contemplating leaving the organization in the long term.

“The deal is still within reach,” said Amrita Sen, co-founder of consultant Energy Aspects Ltd. “But there are risks, and probably the market isn’t appreciating the magnitude of the risk. Saudi Arabia is clearly unhappy with the negotiations.”

©2020 Bloomberg L.P.