By Yousef Saba, Ahmad Ghaddar and Maha El Dahan
May 1 (Reuters) – Saudi Energy Minister Prince Abdulaziz bin Salman now has an OPEC challenge to deal with on top of the largest ever disruption to global oil supplies.
The Iran war has not only hobbled Gulf crude exports but has meant Saudi Arabia and other members of the group of oil-producing countries are unable to tap the spare capacity usually deployed in times of crisis.
This week’s sudden departure of OPEC’s fourth-largest producer last year, the United Arab Emirates, taking with it spare capacity second only to the kingdom’s, poses a formidable test for the first royal Saudi oil minister whose style has shifted from painstaking diplomacy to increasingly unilateral decision making, said two delegates from the broader OPEC+ group, an alliance with Russia and a number of other producers.
“The UAE has been chafing inside OPEC for years and never got a fair hearing over its…quota. So now the chickens have come home to roost,” said Jim Krane, a fellow at Rice University’s Baker Institute.
Also known as ABS, Prince Abdulaziz’s OPEC+ power stems from Saudi Arabia’s massive oil and spare capacity. Unlike past energy ministers, he is a royal backed by his half-brother, de facto ruler Crown Prince Mohammed bin Salman.
ABS waged and won a price war with Russia in 2020 when Moscow initially refused to cut production as demand plummeted, later telling a Saudi documentary: “It was an issue of to be or not to be – who is the boss of this sector.”
He also repeatedly defied former U.S. President Joe Biden’s calls for production hikes. In 2022, OPEC granted ABS, now 66, unprecedented powers, trusting him as chairman to call meetings at any time.
Now, his demand for market discipline is set to meet a new reality. Should the Strait of Hormuz reopen and Gulf oil production normalise, an unconstrained UAE, which accounted for 12% of OPEC production last year, represents a variable the Saudi prince can no longer control.
The Saudi government communications office, the Saudi energy ministry and the UAE’s energy and foreign ministries did not reply to requests for comment.
LITTLE ROOM FOR DEBATE
During the pandemic-driven oil market crash of 2020, ABS insisted on a unanimous agreement for historic OPEC+ production cuts, driving days of marathon negotiations until a diplomatic compromise involving the United States shouldering a share of lone holdout Mexico’s output curbs was reached.
But that gruelling commitment to unity has since hardened, the two OPEC+ delegates said.
Saudi officials now typically inform ministers from smaller OPEC+ producers of the final agreement the day before meetings take place, the pair said. At one recent meeting, calls went first to Russia’s Alexander Novak, then representatives of the other six countries committed to voluntary cuts, lasting less than half an hour in total, one of the delegates added.
Several delegates have acknowledged that Saudi Arabia bears the brunt of output cuts. Still, the source added that the lack of consultation on major decisions was an annoying departure from past practice, while noting that OPEC+ had also marginalised the role of its technical expert assessments in late 2022, effectively pushing decisions directly to ministers, with little room for debate.
“We appreciate what His Royal Highness is doing for the oil price,” the delegate said, however, speaking on condition of anonymity.
While the recent events have prompted questions over OPEC’s survival and its alliance with Russia, one of the delegates and another source familiar with the group’s thinking told Reuters that the crisis would ultimately strengthen cohesion, making for smoother decision-making.
RIVALRY
Saudi Arabia and the UAE’s geopolitical rivalry burst open at the turn of the year when fighting broke out in Yemen between opposing factions supported by Riyadh and Abu Dhabi.
A long-simmering oil dispute within OPEC had already come to the boil in 2021, when Abu Dhabi demanded a higher output quota. A deal securing a 300,000 barrel-a-day boost was only secured after grievances were aired publicly.
“It is unreasonable to accept further injustice and sacrifice – we have been patient,” UAE Energy Minister Suhail al-Mazrouei told Sky News Arabia at the time.
A frustrated ABS told Al Arabiya that “a bit of rationality and a bit of compromise saves OPEC+”, adding that he had “never seen such a demand” in his 34 years of attending OPEC meetings.
The UAE’s quota had risen by about 500,000 bpd, or 0.5% of global demand since 2019, more than that of the group’s other members. That included a boost to the UAE’s target in June 2023, when Angola and Nigeria saw theirs cut. Angola quit months later in anger.
The Saudis had made the concessions as the UAE committed to spending $150 billion on an expansion plan to build more capacity, but on Tuesday it left the group anyway.
WIDENING LOSSES
For oil markets, the UAE’s exit and output targets mean little while the Strait of Hormuz remains effectively closed.
Iraq and Kuwait have lost the most exports, while the UAE has maintained some supply via the Gulf of Oman. Saudi Arabia has managed to reroute 60-70% of exports to the Red Sea via a pipeline built in 1981 during the Iran-Iraq war.
On the sidelines of an OPEC conference last year, which Reuters and other outlets were barred from covering, Mazrouei said the UAE was ready to raise capacity a further 20% to 6 million bpd after 2027 – half of Saudi capacity – a clear challenge to ABS’s fight to rein in overproduction.
(Reporting by Reuters; Editing by Kirsten Donovan)
