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The oil market is stretched incredibly thin, with few producers willing or able to replace Russian barrels banned by the United States and shunned by others. Enter the United Arab Emirates, which suggested that it could come to the rescue.
UAE ambassador to Washington, Yousef Al Otaiba, told DailyExpertNews on Wednesday that the country wants to increase oil production and will encourage the Organization of the Petroleum Exporting Countries (OPEC) cartel to ramp up the supply.
Otaiba’s comments caused oil prices to plummet on Wednesday. US oil fell 12% to less than $109 a barrel. Brent oil, the global benchmark, fell 13% to $111 a barrel. It marked their steepest one-day drop in nearly two years.
If the UAE convinces its partners to turn the tide, it would be a sea change for the cartel, which at its meeting last week with allied producers – a group known as OPEC+ – agreed to stick to a plan to gradually bring oil to the market , defying pressure from developed economies to do more to lower prices.
A major problem for the Saudi Arabia-led group: Russia is one of those affiliated producers.
Last Wednesday, OPEC+ said in a statement it would increase production by 400,000 barrels per day in April — a small fraction of Russia’s 10 million barrels of crude oil production per day. The cartel called the market “balanced,” despite oil prices rising 30% in the past two weeks.
“The UAE has been cracked. They were one of the last holdouts,” Robert Yawger, vice president of energy futures at Mizuho Securities, told DailyExpertNews. “Now that they’ve said it, you can expect the Saudis to say the same.”
The Biden administration on Tuesday banned imports of crude and natural gas from Russia, but Europe, which receives much more Russian energy than the United States, has not. Still, sanctions against Russian banks and concerns over the ability to transport its oil have led to a shadow ban on the country’s energy industry, drastically reducing the amount of Russian oil supplied to the global market.
The West hoped it could add oil from other sources, including OPEC members Iran and Venezuela.
Before sanctions were imposed on Iran, it produced about 4 million barrels per day. But the United States’ return to a nuclear deal with the country has proved elusive. The United States has also started talks with Venezuela, whose crude oil was sanctioned in 2019. But the economically crippled South American country wasn’t producing much oil even before the ban.
OPEC, on the other hand, has the opportunity to ramp up supply quickly as Saudi Arabia and the UAE have additional production capacity.
“We are in favor of production increases and will encourage OPEC to consider higher production levels,” Otaiba said.
The UAE Ministry of Energy has not released a statement, but Otaiba’s comments were subsequently tweeted by the country’s embassy in Washington. It marks the first hint that an OPEC country might be willing to prevent oil prices from spiraling out of control. Some economists fear that if the oil price rises much further, motorists, airline travelers and companies could change their purchasing behavior, potentially damaging the global economy.
“The UAE has been a reliable and responsible supplier of energy to global markets for more than 50 years,” Otaiba said, “and believes that stability in energy markets is critical to the global economy.”
OPEC’s change of tone may come from the sense of a unique opportunity. It could strip Europe of Russian oil and induce them to buy OPEC oil.
“The UAE is essentially saying to Saudi Arabia and Kuwait, ‘Let’s use our spare capacity so that Europeans no longer have to rely on Russia,'” said Andy Lipow, president of consultancy Lipow Associates.
“This is a 180-degree turnaround,” Lipow said, referring to the market’s interpretation of the OPEC stance.
Lipow added that OPEC leaders probably remember what happened in 2008 when the price of oil rocketed above $145 a barrel, only to collapse months later when the global economy collapsed during the financial crisis.
“You can turn the world into a recession,” Lipow said.
The sharp drop in oil prices improves the outlook for pump prices. The national average rose to a record $4.25 a gallon on Wednesday, up a whopping 60 cents in one week, according to AAA.
Rather than hitting $4.50 a gallon, Lipow said current oil prices suggest the national average could be around $4.35 a gallon.
— Matt Egan of DailyExpertNews contributed to this report
