“There is a very wise old saying that ‘it is a very foolish person that seeks to interfere in family disputes,’” Chris Weafer, co-founder of Macro-Advisory in Moscow told New Europe on July 9, asked Russia can mediate to help strike a deal between Saudi Arabia and the United Arab Emirates to raise output. Essentially this is a dispute between two Arab nations who are members of the Gulf Cooperation Council (GCC) and who share a lot of common interests, he added.
Oil prices fell after a breakdown in discussions between major oil producers Saudi Arabia and the UAE over a proposed deal that would have brought more oil to the market.
“Both countries with very powerful regional ambitions and who are led by two powerful individuals, the respective Crown Princes who are happy to be identified by impactful acronyms, MBS (Mohammed bin-Salman) in Saudi and MBK (Mohammed bin Khalifa) in the UAE,” Weafer explained, noting that this dispute has been brewing for some time and is only partly about oil quotas.
“Saudi Arabia has become very assertive in the region since MBS became Crown Prince, in terms of military actions, politics and investment.The UAE has often been seen as something of a smaller brother or a lesser partner. Clearly this has not been sitting well in Abu Dhabi for some time and there have been several events where the UAE has taken its own path,” Weafer told New Europe.
This dispute over oil quotas is essentially part of a push by the UAE to be considered an important and independent player in the Arab world, he said, adding that Abu Dhabi no longer wants to be seen as an appendage to its bigger neighbour.
According to Weafer, the UAE has big ambitions in terms of economic diversification, regional and global investment, and political leadership. Hence it also needs to boost budget revenue with greater oil exports, especially in the next couple of years as the longer-term outlook for crude oil demand will be increasingly uncertain.
Russia reportedly has offered to be an intermediary, probably in much the same way as the UAE was the effective intermediary between Moscow and Riyadh in March 2020. “But the Kremlin will thread carefully and only get involved if invited,” Weafer said.
Moscow is in a good position these days and it need not worry too much about the outcome of this dispute, hence it is best to stay on the sideline, Weafer argued. He explained that the Fiscal Rule adopted several years ago, and the currency devaluation, means that the Russian budget will balance below $50 per barrel and is heading for a breakeven of $44 per barrel in the next couple of years. Saudi and the UAE need a much higher price average to balance their books so will eventually find a solution to the current dispute, Weafer said, adding that Russia can afford to wait and watch.
The US reportedly also had high level conversations with officials in Saudi Arabia and the UAE, the White House said on July 6. But Weafer argued that the US position is different and complicated. “Unlike in March 2020 when President (Donald J.) Trump called for a resolution of the Russia-Saudi dispute, his concern was that prices had collapsed and threatened US oil field jobs. Today, President (Joe) Biden’s concern is that the price of oil will get squeezed higher if OPEC+ does not start to produce more oil as the world economy recovers. His concern is about the impact of higher oil on inflation and the threat both inflation and higher energy prices may have on US and global economic recovery,” Weafer said.
Asked if OPEC+ may abandon output limits that they have followed during the pandemic, Weafer said, “This is a risk, especially if the two respective Crown Princes dig their heels in and refuse to blink first. But, for now, it seems that OPEC+ will extend the existing deal until a resolution can be agreed”. He noted that an abandonment of the OPEC+ agreement seems very unlikely as there is still far too much uncertainty over oil demand in the second half of 2021 and into 2022. A free-for-all in the oil market risks a price collapse if demand does not grow as hoped.
Oil prices rose on July 8, rebounding from early losses after US government data showed a much bigger drop than expected in crude and gasoline inventories. According to Reuters, Brent crude oil futures rose 69 cents, or 0.9%, to settle at $74.12 a barrel, and US West Texas Intermediate futures rose 74 cents, or 1%, to settle at $72.94 a barrel.
Asked if falling inventories offsetting the OPEC standoff, Weafer told New Europe OPEC+ is in a good position to push the price of Brent up to the mid $80s per barrel, the price at which the Saudi Arabia budget would balance. The production restraint of the past 15 months has helped almost eliminate the inventory overhang.
This contributes to the bullish outlook for the oil price, i.e., assuming OPEC+ is not abandoned and demand recovery continues.
The reality is that OPEC+ is in a very strong position looking forward to the end of the decade, if not longer, and provided it can hold the structure together, Weafer said, adding that western oil production is in decline, partly because of tougher environment regulations, partly because of pressure on the international oil majors to reduce investment in hydrocarbons and because there is much less financing available for hydrocarbon projects. It means that OPEC+ market share will rise as demand growth in developing economies continues and the switch to electric transport in developed economies continues slowly.
“Russia, Saudi Arabia, the UAE, and others are heading for an oil windfall, albeit probably the very last such windfall in this industry. One hopes that a family dispute does not put that at risk,” Weafer said.
Asked about his predictions for the oil price until the end of this year and 2022, Weafer said there is a 55% chance the year-end price of Brent will be $85 per barrel. “That assumes that OPEC+ will resolve the UAE quota issue; global demand will edge higher; US shale will not grow much beyond current volumes,” he said, adding that the return of Iranian oil would only have a marginal impact on this assumption.
According to Weafer, there is a 20% chance of $90-100 per barrel Brent. This assumption is based on a strong recovery forecast for the global economy for 2022. It also assumes OPEC+ stays intact and US shale volumes only grow modestly.
He sees only a 5% chance of $110+ per barrel. “That would require a very strong surge in global growth coming into 2022,” he said.
According to Weafer, there is a 10% chance of $60 per barrel Brent. This is the scenario where OPEC+ dissolves and each country opens their oil production taps and substantially ramps up supply. The other risk is that the coronavirus pandemic worsens across major economies, e.g. the US, Europe and Asia, and cuts oil usage back to 2020 levels.
Finally, Weafer sees a 10% chance of $50 per barrel Brent. That would come about with the combination of demand collapse and OPEC+ breakdown.