OPEC’s oil market balancing challenge got tougher and more complex over the past two decades. The organization cut oil production in the face of the 2008 financial crisis, the surge in U.S. liquids growth and most recently the COVID-19 crisis. The scale of OPEC cuts required to balance the market through these crises has risen at the same time the collective capacity to act has diminished, as fewer major producers are able to implement planned cuts.
OPEC’s Gulf Cooperation Council (GCC) core countries Saudi Arabia, Kuwait and the UAE have traditionally formed OPEC’s hard backbone in leading negotiations to deliver output cuts and then rigorously delivering cuts to help rebalance markets and keep prices stable. The cooperation of non-OPEC producers in 2016 to form the OPEC+ grouping is also important. Declining oil production levels in some member countries have unintentionally supported the balancing mission.
But this year was different. After the March flirtation with a price war, OPEC+ agreed to pull an unprecedented 10% of global oil supply in a tapered, multi-year cuts agreement. This time, Russia and other non-OPEC partners not only signed up but largely delivered. OPEC for its part achieved higher-than-usual compliance through additional cuts delivered by Saudi Arabia and other GCC countries as well as hefty political pressure by Riyadh on laggards Iraq, Nigeria and Angola.
The UAE’s breaking of ranks by missing cut targets in July and August therefore is significant. The shift by this core GCC producer undermined Saudi calls for compliance from others and opened fissures in the OPEC+ project. Given Abu Dhabi National Oil Company’s (ADNOC) plans to increase oil production capacity and potentially rising OPEC supply in 2021, ADNOC may have staked out its customer base before other OPEC producers can do so.
UAE leadership may also be reading the runes in Washington. A Biden White House will be much less inclined to twist OPEC arms as Trump did in March. Biden will also establish a more nuanced and balanced approach to both Saudi Arabia and its regional nemesis Iran. Amidst these age-old rivalries, the UAE’s peace deal with Israel has made it a favoured regional player, able to play all sides. A more independent oil policy may be part of this transformation.