Opec+ challenge is overcoming an internal squabble

On the surface, everyone is unified in the Opec+ family. Listen to the ministers ahead of their meeting on Sunday, and everyone is making the right noises. Don't be surprised if the cartel doubles down on its production cuts, at the very least on paper, to try to juice flagging oil prices.

Behind closed doors, it isn't as smooth, however.

While Russia, Iran and Venezuela are pumping more oil than expected right now, despite Western sanctions, the key country to watch going into 2024 is the United Arab Emirates, the fourth-largest producer within the Opec+ alliance.

For several years, the UAE has fought an unsuccessful campaign for a higher quota, commensurate with its rising production capacity. The Emirati push erupted into public in July 2021, when Riyadh and Abu Dhabi clashed at an Opec+ meeting, forcing the group to adjourn the gathering. The meeting didn't re-start until after the UAE several days later backed off from its demands under Saudi pressure.

Almost two years later, the market has largely forgotten about that episode. But the feud hasn't gone away, and it could become central in the next few months as Opec+ starts to plot its 2024 production policy. The difference from 2021 is that Riyadh appears to be ready to oblige its neighbour.

The tensions have been expressed in a series of off-the-record briefings by both sides, with some Emirati diplomats even questioning the value of its Opec membership. My belief is that those briefings were more a tool in the campaign to secure a quota increase than a real threat. If Riyadh allows Abu Dhabi to pump more oil in 2024, as it seems the deal is, I believe the UAE will be happy to stay at Opec.

With the oil market already in surplus, largely due to Russian production, it's difficult to see how committing to add supply would be anything but bearish. Oil prices have fallen to nearly $70 a barrel, down almost 30% from late last year. And that decline is even worse when adjusted for inflation. Currently, the purchasing power of a barrel of oil, in real terms, is back to where it was in 2005.

If supply and demand behave in the second half of the year as Opec currently expects, tightening the market in late 2023 and early 2024, allowing the UAE to boost its production could be easy. The increase would be soaked up by demand for extra oil. But if the market remains loose, any increase could put pressure on prices. 

Opec+ influences prices by setting output targets – called "quotas" – for the group, and for each of its members. The individual levels are calculated based on a mix of historical output, production capacity, oil reserves, and a good dose of horse trading. 

Based on the latest deal among a handful of Opec nations in late April, the UAE has a "voluntary" production level of 2.875 million barrels a day. But the country says its can produce more than 4 million. As such, nearly a third of its pumping capability is going unused. What new output target would satisfy the UAE? If you believe the chatter of Middle East-based diplomats, Abu Dhabi and Riyadh have already agreed in private to a compromise increase. The midpoint, around 3.5 million barrels a day, is probably a good bet. Both sides could claim victory.

If, as I expect, the UAE wins a higher quota in 2024, it's likely to be the first step in a series of increases. Last year, Abu Dhabi brought forward its plan to reach a production capacity of 5 million barrels a day to 2027, from an initial target of 2030.

Politically, it won't be easy for Opec+ to redraw its individual quotas. The last time, it was during the depths of the Covid-19 pandemic, when demand for oil evaporated. The group was under pressure and agreeing to new national targets become easier. Going forward, it may be more difficult. Several Opec nations, including the likes of Angola and Nigeria, are unable to reach their official levels because years of neglect to their petroleum industry. As such, they could see their quotas reduced to reflect this reality. But admitting that one can't pump as much as Opec allows is rather difficult politically.

Opec+ is fighting low oil prices right now. Its attention – and that of the market – is on the next few weeks. But looking ahead, into 2024, if the UAE gets its way at Opec+, we could see more downward pressure on oil prices.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.