Oil prices rose to their highest level in three years after OPEC and its allies abandoned a decision to increase oil production as Saudi Arabia, Russia and the UAE struggled to reach a compromise.
OPEC+ oil ministers were set to meet again on Monday after failing to reach a deal late last week, with the UAE annoyed by a supply target it believes is too low and underestimates production capacity.
But as high-level bilateral talks were unable to break the deadlock and find the required unanimity ahead of the scheduled start of the formal meeting, the virtual meeting was cancelled.
The meeting has been “cancelled,” OPEC secretary general Mohammed Barkindo told ministers. “The date of the next meeting will be determined in due course.”
A person familiar with Saudi Arabia’s policies said the UAE’s stance would put a deal out of reach and prices would likely rise as a result.
“We missed a good opportunity to help the market solve a temporary shortage,” he said. “They [UAE] must now absorb the heat of higher oil prices.”
Brent crude, the international benchmark, climbed 1 percent on the news to $77.09 a barrel, the highest level since 2018. The US benchmark West Texas Intermediate rose to $76.20 a barrel. On Tuesday, Brent climbed further to $77.84 a barrel, while West Texas Intermediate hit $76.98 – its highest since 2014.
“The postponement of the Opec+ meeting brings the market closer to an August without additional barrels from the alliance, which is why oil prices jumped straight into the news,” said Louise Dickson of consultancy Rystad Energy.
Riyadh and Moscow have proposed to increase production by 400,000 barrels per day each month from August to December and extend the OPEC+ supply agreement agreed last year beyond its scheduled end date of April 2022.
While the UAE said it supported increasing output, it has demanded that its own base production – which is used to calculate supply cuts – consider its higher output capabilities and be assessed before agreeing to extend the deal.
People familiar with the UAE’s position said Saudi Arabia and Russia needed more time to discuss Abu Dhabi’s position, which remained unchanged.
“There is no delay,” said a person familiar with the Saudi and Russian position. “The UAE blocked the decision, so the meeting is cancelled. Current production levels will remain as they are.”
Oil prices are up 50 percent since the start of the year as demand has recovered from the depths of the pandemic, with vaccination programs allowing rich countries to reopen.
Opec+ cut oil production by nearly 10 million barrels per day last year, nearly 10 percent of pre-pandemic demand, while consumption fell, and has slowly brought inventories back to the market in recent months. The current cutbacks are just under 6 m b/d.
Analysts said a resolution to the UAE’s baseline complaint was complicated by the fact that it would likely involve revising other countries’ targets, which could lower quotas for some of the largest producers, including Russia. .
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The standoff has exposed tensions between Saudi Arabia and the UAE, traditionally close allies in Gulf politics and within OPec. The UAE has invested heavily in increasing its oil production capacity in recent years.
Some analysts warned that tensions in the Opec+ group could lead to much more supply if the underlying deal were unravelled, leaving producers without production restrictions.
Last year, Saudi Arabia ramped up production sharply at the start of the pandemic after Russia initially refused to step in to cut inventories, exacerbating the price collapse as lockdowns and travel restrictions began to dampen demand.
The deal to cut production in April 2020 was brokered in part by then-US President Donald Trump, who called for an end to the price war plaguing the domestic shale oil industry.
Last week, the Biden administration said it was concerned about the magnitude of the oil price hike in recent months, which analysts saw as a signal to Gulf allies, including Saudi Arabia and the UAE, that Washington would like a higher production would see cool the rally.