UAE is Throwing a Tantrum but More Likely to Make a Compromise

A regular meeting scheduled for July 5th by the Organization of the Petroleum Exporting Countries (OPEC) was unexpected to end up with nothing in the agreement to the increase in production even if the initial intention of the session was the deliberation of boosting outputs. It is the United Arab Emirates (UAE) among member states that hoped to increase the quota on the rise of production, which was refused by the Kingdom of Saudi Arabia (KSA). Affected by this news, oil prices saw a growth followed by a steep slump. As for the analysis of the aftermarket, different opinions have been rife in the market.

The main reason for the surge in oil prices is that no agreements on the increase in production have been made. However, the financial market turned to be worried about the possibility of the UAE leaving OPEC and increasing production rapidly and the likelihood of other member states following suit. Therefore, it is understandable that oil prices have been under pressure because of these negative ideas. Yet, the crux of this issue is whether the KSA and the UAE can save the disadvantageous situation through negotiation in private. Once it fails, the UAE may withdraw from the organization on one hand. On the other hand, the KSA may play the same trick as it did during its price war with Russian in March and April last year. It unilaterally increased oil production dramatically and lowered prices for dumping, leading the WTI Crude Oil futures to a collapse to USD -40 unseen in history, which is more frightening.

However, in my opinion, the UAE will learn from the terrible experience and give in at the end because of its fear of the KSA prone to revenge by carrying out suicide increase in production and dumping. Besides, the relationship between them is more likely to be improved rather than worsened as it has been historically bridged. As such, oil prices will grow again and march toward USD 77 even USD 80 if everything goes well. However, they will be adjusted to USD 68 even USD 65 with an aim of gaining support once the UAE is forced to leave OPEC.

In addition, the possibility of the KSA rapidly increasing production and reducing prices for dumping as revenge is not high from my perspective even though it remains the most concerning in the financial market. Apart from the uptrend of oil prices at present, throughout history, the KSA hasnt taken similarly offensive responses when seeing member states withdraw from the organization, which indicates that its previous conduct targeted Russia instead of the OPEC member states. Hence, I am prudent but optimistic about the trend of oil prices in the short run.