Following a suspense-filled weekend in Vienna, where OPEC oil ministers attempted to downplay media attention, global oil markets remain uncertain about the direction of oil prices. The recent “surprise” oil production cut announced by Saudi Arabia’s Minister of Energy, Prince Abdelaziz bin Salman, has failed to restore confidence in the increasingly fragile OPEC+ alliance. Pressured by his own remarks and attempts to limit coverage by critical reporters, OPEC’s leading member had no choice but to bear the burden of yet another production cut. Many analysts expected OPEC+ to extend the existing cuts, while neglecting the real underlying issue. The lack of transparency from Russia regarding its oil production and exports, coupled with Moscow’s refusal to discuss potential new cuts, has placed a strain on the OPEC+ alliance. While all members have managed to mitigate the damage temporarily, the outcomes and statements suggest a scorching summer ahead. Diverting attention to 2024 deflects from the pressing concerns at hand.
Over the past week, global oil markets have been dominated by the statements of Saudi Energy Minister Prince Abdelaziz bin Salman, particularly his comments on short sellers during a summit in Doha, Qatar. These remarks sparked optimism among bullish traders, who interpreted them as a signal of potential production cuts. However, Prince Abdelaziz’s stance on critical journalism, particularly with renowned media outlets like Bloomberg, exposed the fragile internal cohesion within OPEC. Russian Energy Minister Novak’s statement that there is no need for additional cuts further aggravated Saudi concerns, undermining any prospects of genuine cooperation between the two parties and leaving the OPEC+ alliance hanging by a thread.
Simultaneously, other key OPEC members, notably the UAE and various African nations, have been pushing in the opposite direction. Abu Dhabi, having made substantial investments in its upstream sector, is seeking ways to capitalize on its increased production capacity in the coming years. OPEC’s current production cuts hinder this objective, as future volume increases will be restricted. Similarly, African members like Nigeria and Angola find themselves in a similar position, with their current production volumes not aligning with their nominal production capacities. OPEC’s move to reassess African quotas based on their actual production levels is perceived as a direct threat to their future prospects.
The dynamics within OPEC are fraught with tensions, as conflicting interests and divergent objectives strain the alliance. The delicate balance between short sellers, critical journalism, production cuts, and individual member ambitions has pushed OPEC to the brink, jeopardizing its future stability.
Although Saudi Prince Abdulaziz expressed trust in Russia’s commitment to the production cuts in a recent interview, emphasizing the need to “trust but verify” with the assistance of secondary sources, this statement should not be underestimated. Russia’s current production and export strategy starkly contradicts the existing agreement. It is evident that Moscow is unwilling to curtail its exports, as it requires substantial funds to fund its war in Ukraine, all the while witnessing a gradual erosion of its regional power base. Financing is crucial for the survival of Putin’s regime, particularly in the light of the potential offensive by Ukraine’s armed forces to push back Russian troops in the occupied territories.
Until now, Saudi Arabia has remained committed to sustaining the pro-Russian cooperation within OPEC+, but it is becoming increasingly apparent that Riyadh is slowly realizing the limitations imposed upon itself by aligning closely with Putin’s interests. The implications of this association are being recognized by Saudi Arabia, highlighting the constraints it has placed on its own decision-making and strategic maneuverability.
Another major concern is the increasingly difficult oil market cooperation between Saudi Arabia and the United Arab Emirates (UAE). While speculations about the UAE leaving OPEC remain unfounded, internal tensions within the alliance are apparent. UAE’s Energy Minister, Suhail, stated that Abu Dhabi will extend its voluntary cut of 144,000 bpd until the end of December 2024, as a precautionary measure in coordination with other participating countries in the OPEC+ agreement. He reiterated that this cut would be from the required production level agreed upon at the thirty-fifth ministerial meeting of OPEC+ on June 4, 2023. It is essential to view this statement as a diplomatic gesture towards Saudi Arabia, rather than openly questioning the UAE’s commitment to cooperation.
However, in reality, this voluntary cut is minimal and places extreme pressure on the leadership in Abu Dhabi to navigate a challenging path. Sustaining the cuts until the end of 2024 is unrealistic, both for OPEC and global oil supply. Undoubtedly, there will be an increase in demand in 2023, even if the anticipated 800,000 bpd demand increase from China falls short of expectations.
The UAE’s balancing act poses significant challenges. The sustainability of the extended cuts and the broader cohesion within OPEC remain uncertain amidst shifting market dynamics and divergent objectives among member countries.
In the short term, some upward price movements will be seen. A cut normally always has some bullish impact. However, when the bearish narrative of recession fears reemerges, the sentiment in oil markets could turn sour once again.
Overall, the risk for the oil market cannot be underestimated. Instability within OPEC+ bad news. Saudi Arabia needed to put its money where its mouth was last week, but forgot that the reactions from its OPEC peers might not be positive at all, and that additional cuts do not necessarily guarantee higher oil revenues. The escalating crisis between Saudi Arabia and Russia has now become apparent for all to see. What was once dubbed an “unholy alliance” by some has unraveled due to Moscow’s increasing desperation for cash and geopolitical influence, which no longer aligns with the interests of the other parties involved. Prince Abdulaziz will soon find himself in a position where he must address his own brother, Crown Prince Mohammed bin Salman, and explain why the current course of action will fail to generate additional revenues. The success of Saudi Vision 2030 is pivotal, not only for the stability of crude oil prices but also for the future trajectory of Crown Prince Mohammed bin Salman himself.
This uncertainty may bring the return of the more self-centered production policies, such as we’ve seen in 2020. If some OPEC+ members will decide to unilaterally increase their own export volumes, this may upset other OPEC+ members which could opt to do the same, causing oil prices to plunge as a result.