The regional and OPEC geopolitical dynamic has been greatly defined by the long simmering “Cold War” between regional Gulf powers, Saudi Arabia and Iran. But this may be changing as the United Arab Emirates (UAE) strives to become a more significant player and potential peer to Saudi Arabia. Following four days of seemingly smooth negotiations, OPEC+ snatched uncertainty from the jaws of victory. The group manage to go from a deal nearly done to a complete collapse in talks. Oil market volatility quickly responded.
In the end OPEC’s inability to reach agreement says more about growing fractures in the UAE-Saudi relationship, and the emirate’s interest in taking its more prominent place at the table, than provide any short-term indication on supply. But this failure may be the start of a larger geopolitical shift within the Gulf Cooperation Council (GCC) states and two key allies within that group.
Note that soon after the oil talks collapsed Saudi Arabia banned flights arriving from the UAE and revoked several special trade privileges with the UAE. Both highly unusual moves signaling tensions are increasing. Some of these issues have been with us for some time, but as they escalate, they pose a serious threat to OPEC unity at its GCC core. Although, anyone calling for the end of OPEC is likely premature, these developments create massive new long-term supply uncertainty going forward
The Roadmap to Failure
Heading into the early July OPEC+ meeting there was little expectations of drama. Within a day it was widely reported that a deal had been reached for an increase in OPEC production. Saudi Arabia had initially asked for a gradual 500,000 bpd per month increase for a total of two million bpd through December of this year with cuts starting up again in Q1 2022.
The UAE pushed back stating they they’ve had to bear the brunt of the cuts so far, and any further cuts would continue fall unfairly on them. After several days of talks no compromise was struck and as OPEC requires unanimous decisions, no deal was reached. Initially, WTI spiked to a six-year high of $76.98/barrel.
While on its face this seems like a simple dispute that should be easily settled, as of writing no deal is in place, no progress has been made, and there isn’t even a timetable of when talks will reconvene. In order to better understand this impasse, I believe some further regional context would be helpful.
The UAE has quietly been making move trying to be a bigger player in the Middle East in the recent years. These moves include pushing for closer relationship with US, even going as far as being the first Arab State to recognize Israel, a move the United States has long sought from Saudi Arabia to no avail. Likewise, increased weapon purchases from the US have shown a concerted effort by the UAE to strengthen US ties.
Saudi Arabia has long enjoyed and benefited from the backing by the US. Any challenge for this support by the UAE will likely constrain Saudi Arabia, serve to weaken their standing as the US looks for strong allies in the region to counter Iranian expansion. Likewise, some recent missteps by Saudi Arabia, have called into question their ability to maintain this support.
One black mark is the lack of progress in Yemen’s long running civil war. Yemen’s civil war is a complicated proxy conflict between Saudi Arabia and Iranian backed Houthi fighters and merits its own write up, but some notable events are worth highlighting. Saudi Arabia and UAE were initially aligned, along with the rest of the GCC in supporting Abdrabbuh Mansur Hadi. Over time, cracks in GCC alliance started to form. From 2018, the UAE started proving greater support to the Southern Transitional Council (STC), a separatist movement calling for the independence of South Yemen. This conflicts directly with Hadi’s desire to reconquer the country from the Houthis. The UAE even went as far as to briefly claim the strategic Socotra Island, before Saudi pressure prompted them to hand the Island back to the Hadi government.
As the war in Yemen has dragged on, the UAE has increasingly questioned Saudi leadership in the region, although it hadn’t yet bled over into OPEC strategy discussion in a serious way. This appears to be changing. Pressure from Houthi forces has forced the STC and Hadis government into unproductive peace talks in an effort to unite and better battle against Houthi forces. This undercuts Saudi influence in Yemen and will only empower UAE to continue to challenge Saudi Arabia.
Although the OPEC no deal was a surprising outcome last week, signs of UAE displeasure, and questions around Saudi leadership in the region, particularly under controversial MBS, have existed for some time. That said such a public OPEC spat, especially among core GCC allies, is still a jarring sight and rightfully spooks markets.
Short term, I’m skeptical of those already burying OPEC. Yes, we think UAE challenging Saudi leadership is a theme we will continue to see in the region for some time. However, while the UAE may no longer want to play second fiddle to Saudi Arabia neither of these two will want to squander the OPEC+ supply management credibility and clout accrued over the past 12-18 months.

Alexander Saucer
Alexander is a physical operations analyst supporting physical crude oil operations for producers. He has a BA in economics from Furman University.