Want to know why the United Arab Emirates is blocking an OPEC+ deal on collectively raising output unless it gets to effectively raise its own output quota? The chart below helps tell the tale, according to Edoardo Campanella, economist at UniCredit Bank in Milan.
It all goes back to the April 2020 agreement by OPEC+ -- the group made up of the Organization of the Petroleum Exporting Countries and its allies -- to cut output by 10 million barrels a day.
That agreement required most individual countries to cut output from their October 2018 production levels. U.A.E, wants to change the baseline from October 2018 to April 2020. That would allow U.A.E. to pump significantly more oil, as its production in April 2020 stood at 3.841 million barrels a day versus 3.16 million barrels a day in October 2018.
Indeed, the chart shows that U.A.E. was "heavily penalized" by the decision to use 2018 as the baseline, Campanella said, noting that the expansion in production capacity resulted from a series of investments that are expected to increase output to around 5 million barrels a day by 2030.
The U.A.E., as a result, is now sacrificing 31% of its capacity, the highest such percentage among OPEC+ members even though it's only a midsize producer, the economist said. A shift to a 2020 baseline would see U.A.E. idling just 17% of its capacity, largely in line with other countries.
The U.A.E. has grumbled about the baseline before, but it all came to a head last week when the country refused to sign on to a proposal to further ease output curbs by 400,000 barrels a day per month from August through December -- a move that would add around 2 million barrels a day to output through the end of 2021. U.A.E. has said it's fine with OPEC+ boosting output, but contends it should be able to use the more favorable baseline.
The U.A.E. has also pushed back against a proposal to extend the expiration date of the current agreement on output cuts from April 2022 to the end of next year.
The stalemate has raised questions about U.A.E.'s commitment to OPEC and whether the country could be tempted to exit the cartel.
Saudi Arabia, OPEC's de facto leader, and Russia, OPEC's key ally, have both rejected those calls, in part out of fears other countries might also demand changes in their baselines, analysts said. An OPEC+ meeting on Friday ended without an agreement, while a Monday meeting was scrapped after no progress was made over the weekend.
The uncertainty around OPEC+'s next move has made for volatile trading in oil markets, with futures on West Texas Intermediate crude , the global benchmark, hitting a 6 1/2-year high Tuesday before turning sharply lower. Brent crude , the global benchmark, traded at its highest since 2018 before also turning south in Tuesday's session.
The initial pop higher came on expectations OPEC+ crude output would remain unchanged as demand continues to grow over the second half of the year, while analysts tied the subsequent selloff to growing fears that the U.A.E. and other members could move on their own to ramp up production if the stalemate remains unresolved.
Oil futures were moderately lower Wednesday after an early push to the upside.
Is there a way out? The chart "shows that there is room to rebalance the UAE's quota, but it would require other members to contribute more to the deal," Campanella wrote. "For the UAE to have a percentage of unused production capacity similar to Kuwait or Iraq (two other mid-sized producers), its production should be increased by 400,000 barrels a day" -- which would match the amount of additional output the whole group ws planning for August.