Earlier this month talks between OPEC and its allies led by Russia, a grouping known as OPEC+, fell apart over a dispute that pivoted on individual quotas for pumping crude.
Crude prices have recently soared to their highest levels in two and a half years as economies around the globe – especially more developed ones- cast-off COVID-19 restrictions, boosting demand for energy.
After Reuters news agency reported that Saudi Arabia and the UAE had struck a compromise, global benchmark Brent crude fell by roughly $1 towards $75 per barrel. Both countries are major OPEC producers.
Last year, oil prices crashed after COVID-19 lockdowns gutted global crude demand and Saudi Arabia piled even more pressure onto markets by declaring an oil price war after it could not get its fellow OPEC+ members to agree to deep cuts.
The crash in prices led to escalating geopolitical tensions between Washington and Riyadh, as United States shale oil producers – whose productions costs are far higher than Saudi Arabia’s – faced an existential threat to their existence.
But oil markets stabilised last year after OPEC+ agreed to record output cuts of roughly 10 million bpd. Those curbs have been gradually eased since then and now stand at about 5.8 million bpd.
While most OPEC+ members supported a proposal to unwind the remaining cuts by boosting output by 400,000 bpd every month until the end of next year, the UAE refused to endorse it unless its individual production quota was raised.
An OPEC+ source told Bloomberg News on Wednesday that the compromise with Saudi Arabia will see the UAE’s output baseline rise from its current level of about 3.17 million bpd to 3.65 million.
OPEC+ has yet to make a final decision on its output policy and it has not yet announced a new meeting date after talks were abandoned this month.
But that boost to the UAE’s baseline potentially opens the door for other OPEC+ members to raise their individual output quotas.
There was evidence that global oil markets were getting fed up with soaring crude prices. Oil was trading lower on Wednesday before news of the Saudi-UAE compromise deal was reported because of weakening demand from China, the world’s largest oil exporter.
“Traders started realizing that oil might be getting too expensive for too long after China’s half-year crude imports were reported to have fallen by 3% against the same time in 2020,” analysts at Rystad Energy wrote in a note to clients on Wednesday.
“As China is the world’s top crude oil importer, a decline in imports, especially since it is the first one since many years, is a significant price signal for the market to step on the brake pedal.”