Politics seep into oil as diverging goals test Saudi & UAE relations

Like many relationships, the one between Saudi Arabia and the United Arab Emirates had long rested on two simple principles for when disputes arose: Deal with them behind closed doors or bite your tongue.

After the neighbours’ public spat over future Opec+ oil output, that’s now looking hopelessly old-fashioned and the consequences are rippling out from the Persian Gulf. Most obviously, the tussle has left a question mark over crude supply as major nations emerge from Covid lockdowns. Opec+ abandoned its meeting on Monday without a deal, sending oil past $77.

Oil prices climbed to multi-year highs on Tuesday. Brent crude hit a session high of $77.84, a level not seen since October 2018, before losing momentum and easing to trade $1.95, or 2.53 per cent lower, at $75.21 a barrel by 8.40 pm IST. US West Texas Intermediate (WTI) crude futures traded up $1.05, or 1.40 per cent, at $74.11, after reaching $76.98 earlier in the session, the highest since November 2014.

The tussle underlined a growing economic rivalry that’s been sharpened by the pandemic and has implications for global companies, as well as a political divergence with repercussions across the Middle East from Yemen to Israel, Iran to Qatar.

While no one’s saying ties are set to break down, the ground rules have shifted.

“More than 80 per cent of the time, these two capitals are on the same page,” said UAE political science professor Abdulkhaleq Abdullah. “However, there is growing economic competition; it is growing deeper by the day.”

The trigger for the Opec+ showdown was the UAE’s opposition to a Saudi-led production deal. The US is urging compromise. Abu Dhabi wants to renegotiate the level from which its output cuts or increases are calculated, giving it the ability to pump more oil after strengthening ties with energy-hungry markets in Asia.

The acrimonious rhetoric surprised everyone, said a person familiar with high-level discussions, describing it as politics spilling over into the oil talks and vice versa. Mediation made little headway, and a couple of decisions taken away from the Opec+ negotiating table threatened to further poison the atmosphere.

Saudi Arabia banned flights to the UAE as talks broke down at the weekend, citing virus concerns. While the timing could be coincidental, it comes ahead of an Islamic holiday when Gulf visitors typically descend on Dubai, now reopened for tourism. Riyadh also said it would exclude imports from free zones or linked to Israel from a preferential tariff agreement with neighbouring Gulf nations, potentially dealing a blow to a key pillar of the UAE economy. The relationship between Abu Dhabi’s crown prince, Sheikh Mohammed bin Zayed and his Saudi counterpart, Crown Prince Mohammed bin Salman, appears to have cooled, though, as Abu Dhabi flexes its muscles geopolitically, asserting an independent foreign policy.