The Minuses of OPEC+ Are Exposed by the UAE

(Bloomberg Opinion) -- The genius of the OPEC+ brand is that it literally spins a negative as a positive. OPEC's expansion in late 2016 wasn't a case of groupies clamoring to gain entry to the club; rather, an old institution fallen on hard times sought fresh supporters. Since then, it has worked best the way the old OPEC worked best: with its back to the wall. When Covid-19 hit last year, OPEC+ called ceasefire on a barely-begun price war and slashed production.

A year or so on, oil is back up to almost $80 a barrel, but the club is unhappy again. And it's for the same underlying reason. You could call that reason the energy transition but it's more of an everything transition.

The spat between the United Arab Emirates and Saudi Arabia (and the rest of OPEC+, nominally) is on one level about barrels and baselines. The UAE contends it deserves a higher production target and also doesn't want to extend the agreement. Saudi Arabia, meanwhile, has no desire to reopen the books on quotas and wants to keep a firm grip on the oil market through 2022.

But the schism runs a bit deeper than that. The UAE has been acting a lot like it foresees an expiration date for OPEC, plus-size or otherwise. It has invested heavily in boosting production capacity (hence the insistence on a higher target). It has sliced and diced its oil business into saleable chunks, keeping control but bringing in cash upfront. It has launched a new oil futures benchmark that, if to be successful, rather undercuts the whole idea of supply restrictions.

In short, the UAE is preparing for a world in which oil demand could peak and low-cost producers such as itself are best served selling every barrel as quickly as they can.

Such a world would differ in other ways too, most notably in terms of U.S. security arrangements in the Middle East. With Washington's relationship with Riyadh having become more ambiguous, the UAE is setting itself apart, signing the Abraham Accords with Israel, for example (at which Saudi Arabia just took a swipe).

For its part, Saudi Arabia has also displayed peak-demand instincts, just with less conviction. The IPO of Saudi Arabian Oil Co., or Saudi Aramco, was pitched originally as preparation for this. That was before the reality set in of just how much oil fuels the country's economy and international standing. Riyadh is dealing with its everything transition in its own way, mixing old-style oil-market manipulation with efforts to wrest post-oil business away from neighbors and nominal allies like the UAE.

This is not to say the UAE is intent on blowing up OPEC+. If the group can inject a premium into oil prices, the UAE benefits just like any other producer in the short term. Transitions are better for incumbents when they are gradual and some sort of compromise still looks likely. But the country's approach has clearly diverged from that of its larger neighbor and it may envisage being more of a plus-one than official OPEC-ite.

Through its actions, the UAE also implicitly recognizes the danger higher oil prices pose to demand. This isn't 2007, when an oil man sat in the Oval Office and electric vehicles remained largely the stuff of prototypes. And today's apparently tight market is artificial, with OPEC+ holding roughly six million barrels a day off the market. Meanwhile, U.S. shale producers are chastened by the backlash against the past decade's profitless boom (profitless for shareholders anyway). Yet sustained $80-ish oil on the back of a conclave simply standing pat will test consumers' patience (and resources) as well as shale's forbearance.

So this rally looks unsustainable. As for the club itself, consider that of the original five OPEC founders, only Saudi Arabia and Kuwait could now be thought of as relatively stable, dependable oil producers. The other three — Iran, Iraq and Venezuela — are in various stages of advanced economic degradation. Many members of OPEC+ are there just to fill seats, either too small to matter or lacking the wherewithal to grow or even maintain production.

Indeed, this latest iteration has largely been a Saudi-Russian duopoly, with Riyadh's various representatives going out of their way in public to flatter the Kremlin. Irritation at that provides one more spur for the UAE to look beyond. The bigger reason is that the old certainties that underwrote OPEC — ever rising demand, long price cycles, U.S. security for trade and the Arabian peninsula — are slipping. That is why OPEC+ exists in the first place. Whatever force pulls the UAE toward what comes next is getting stronger than the one holding it in place. That's a dynamic with consequences for the entire group.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.