Rift between Qatar & GCC: How does it impact oil price?
The outcomes of OPEC and its allies meeting in Vienna in May 2017 were not very encouraging. World has not seen a hike in oil prices post-summit, as OPEC & associates efforts fail to influence crude market price, in such a scenario, current developing rift between GCC and Qatar may have the potential or impact oil prices. Will that impact be positive or negative? Let’s evaluate..
Few days back Saudi Arabia, the UAE, Bahrain and Egypt declared they have cut off all diplomatic ties and disconnected all land, sea and air links with Qatar. This very news made small agitation in oil prices as it increased by 1 percent.
The continued severance between these giant oil producing entities could change the course of oil prices completely. The balance of energy supply in the region is expected to disturb as a result of trade ban. Qatar is the largest producer of LNG having exported 80 million mt of LNG last year; more than 30% of a total global supply of 258 million mt. Dealers predicted any interruption in Qatari LNG supply could have a substantial effect on pricing, regional trade flows and energy security in Egypt, UAE and Oman, which are major importers of Qatari LNG. Cargoes would have to come from elsewhere. Meanwhile, Qatar might have some additional volumes that can be sold into other Middle East countries and the Far East.
Besides LNG, Qatar supplies 2 Bcf/d of gas to the UAE and Oman through the Dolphin pipeline. With a capacity of 3.2 Bcf/d, it is the only pipeline transporting natural gas across borders between Arabian Peninsula countries. Qatar also produces 600,000 bpd of crude; hence Qatar has a role in oil market too. Either this production is rolled back or doubles depending on the political development it would disturb the oil price market.
Graphic Reference: http://www.dailymirror.lk
However on the other hand, Qatar has one of the most stable economies, extensive reserve capital, enormous foreign funds and a second to none per capital income. This financial stability means Qatar would want to ensure that amidst this diplomatic war, it should not lose any business in terms of oil & gas (and its products) export. Ultimately, Qatar would take every possible route to keep its supply of oil constant, despite suffering from increased logistics cost. Given its financial stability, it can bear that extra burden, maybe even sell at loss just to keep market share or create troubles for its peers in the gulf.
Let’s review history of oil price when there have been crises in the Gulf. In March of 2014, Saudi Arabia, UAE & Bahrain withdrew their ambassadors from Qatar accusing it of supporting Muslim Brotherhood. The rift continued for about 08 months, when somewhere in November 2014 relations between the Gulf countries were restored. If we analyze the oil price trend in this time, we can observe that initial couple months of the rift (march to june), there was no impact on oil price (similar to what we are observing now in the current rift case). After June 2014, oil price had started to go down. This slump in the prices was not a direct result of the crises in Middle East, rather a case of supply demand imbalance and boom of shale gas in the US. Hypothetically, even if we consider the diplomatic crisis in Middle East a major contributor in oil price fall (which it wasn’t on factual grounds), the result was decrease in the oil price, not an increase.
All in all, if this rift is short-term, which most likely it is, than the impact on oil price will be minimal. Moreover, given Qatar’s stability and resolve to ensure market share, it may even go all out to sell at decreased rates only to hurt its counterparts without caring about short term profits. This will mean a negative impact on crude prices. This theory is not only backed by historical trends and market evaluation, but also by shear common sense.
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