The United Arab Emirates and Saudi Arabia have reached the outline of a deal that would unlock an agreement by Opec and its allies to raise oil production, four delegates and advisers to the group said on Wednesday, but cautioned discussions are continuing and the deal is still to be finalised.
Saudi Arabia has agreed in principle to revising the UAE’s “baseline” production level, people familiar with the talks said, after the Gulf state effectively blocked an Opec+ agreement last week because it did not address concerns over its own output target.
They said a deal appeared to be close, but final details over the exact level of the baseline — which is the basis for calculating a member country’s production target — were still under discussion.
Any agreement between Saudi Arabia and the UAE will still have to be signed off by other members of the Opec+ alliance, which includes Russia, at a meeting that has yet to be arranged. The UAE energy ministry confirmed that “deliberations and consultations between concerned parties are ongoing”.
Opec had aimed to raise production by 400,000 barrels a day each month between now and the end of the year. This schedule will probably be reinstated if the UAE-Saudi Arabia agreement comes to fruition and other members back revising the UAE’s baseline target higher.
The UAE has raised its production capacity in recent years, from about 3.5m b/d in 2018 to 4m b/d today, meaning it believes it is entitled to a higher baseline and therefore output target. By 2030 it should be closer to 5m b/d.
Opec meetings this month reached an impasse because of the dispute between the UAE and Saudi Arabia, fuelling volatility in crude oil markets amid concerns that the spat would prevent the planned supply increase and undermine the cartel’s co-operation.
The group, which slashed production by almost 10m b/d at the height of demand-sapping lockdowns last year, has been slowly increasing output as demand has recovered, but at a rate many oil traders and analysts believe is too slow to stop the market from rapidly tightening.
On Tuesday, the International Energy Agency warned that unless Opec moved quickly to lift supply, rising oil prices could begin to drag on the economic recovery from the pandemic.
Oil prices hit the highest level since 2018 last week, climbing above $77 a barrel. On Wednesday Brent crude was down 0.5 per cent at $76.14 a barrel.
Formal confirmation of the deal between the two countries may wait for another Opec meeting, suggested the people familiar with the talks, who cautioned that relations between the two erstwhile Gulf allies remained strained.
“They may not confirm officially,” said an adviser to Gulf countries familiar with the negotiations, referring to Saudi Arabia. “I think they don’t want to give the UAE such a boost.”
Reuters reported on Wednesday that the deal was done, with the UAE being given a new baseline target of 3.65m b/d.
Two of the four delegates and advisers told the Financial Times they expected the final agreed baseline could be lower, possibly about 3.5m b/d. The Gulf adviser said the new baseline would apply from April 2022.
Saudi Arabia wants to extend the Opec+ deal to at least the end of 2022, believing the oil market needs greater certainty given the Covid-19 crisis and the emergence of coronavirus variants such as Delta.
One of the people said Saudi Arabia might not wish to confirm any preliminary agreement at all, preferring for it to be raised only once Opec+ is ready to meet and sign off on the wider deal.
Riyadh is keen to downplay the depth of the split with the UAE over the issue, given their longstanding alliance.
Ayham Kamel at Eurasia Group said that while Saudi Arabia has significant leverage within Opec+ to get any agreement through, there was still a risk other countries may object if they also want their baselines revised.
“The UAE issue could very well open pandora’s box requiring a broader reconsideration of the baseline issue for member states,” Kamel said. “Risks to a potential agreement have not evaporated.”