The Fuse

Limited Impact on Oil Markets From Qatar Row, but Geopolitical Uncertainties Loom

by Matt Piotrowski | June 06, 2017

The diplomatic standoff between a number of Arab countries and Qatar has rattled nerves, sending shockwaves through the international arena. While oil and gas supplies have yet to be significantly affected by the current spat, it could escalate tensions in the region, home to a majority of the world’s oil reserves, and lead to deeper geopolitical instability. The clash also serves as a reminder of the vulnerability of the global oil market for having to rely heavily on OPEC, and Mideast crude supplies in particular, for its needs.

The clash serves as a reminder of the vulnerability of the global oil market for having to rely heavily on OPEC, and Mideast crude supplies in particular, for its needs.

Saudi Arabia, the United Arab Emirates, Egypt, Yemen, the Maldives, and Bahrain cut diplomatic ties with Qatar over allegations of Doha’s support for terrorism. The group of Arab countries also restricted trade with Qatar in an effort to isolate Doha.

Kuwait is reportedly trying to mediate between Saudi Arabia and Qatar. Even if the situation de-escalates in the coming days, the situation with Qatar will remain a flashpoint, given that Saudi Arabia’s grievances against Doha are longstanding and the relationship between the two countries has been fraught for some time.

“Anytime you have the world’s largest oil exporter feuding with the world’s largest LNG supplier, energy markets will take notice,” David Weinberg of the Foundation for Defense of Democracies (FDD) told The Fuse. “This may not lead to a long-term, or even a short-term, disruption, but the conflict is a lot nastier than before. For the Qataris, it’s worrisome because it could negatively affect their economy and long-term investment.”

“This may not lead to a long-term, or even a short-term, disruption, but the conflict is a lot nastier than before. For the Qataris, it’s worrisome because it could negatively affect their economy and long-term investment.”

Although no major disruption has yet to occur, action taken by the UAE could have implications if the row escalates. The UAE has reportedly stopped vessels coming to or from Qatar using its anchorage point off Fujairah. The UAE takes condensate, LNG, and natural gas from Qatar, so these flows could be affected as long as relations remain on the boil. One possible big shock to Qatar would be the UAE cutting off Qatar’s natural gas exports via the Dolphin pipeline, which is owned by Abu Dhabi, Total, and Occidental and can carry up 3.2 billion cubic feet of gas per day.

For the larger global oil market, Qatar is not a big player. It is one of the smaller producers in OPEC at about 600,000 barrels per day (roughly 2 mbd when all liquids are included) and sends most of its crude and condensates to the Asian market. For the current production cut that OPEC set in motion late last year, Qatar agreed to throttle back by 30,000 b/d, which compares to Saudi Arabia’s pledge of 486,000 b/d. In the LNG market, however, Qatar carries a lot more weight. As the world’s largest exporter of LNG, it ships about 30 percent of global supply, with an overwhelming majority of the volumes sent to Asia. Even with the current clash, supplies are unaffected. Qatar can still ship its crude and LNG volumes through Iranian waters and the Strait of Hormuz. The situation, however, would quickly escalate if there is an attempt to stop Qatar from exporting to its customers in Asia.

In recent years, Qatar has uniquely positioned itself as a regional power because of its status as the world’s largest exporter of LNG. It holds reserves of 866 trillion cubic feet.

Qatargas

Oil prices initially spiked Monday morning on the news about Qatar, but they retreated and Brent remains below $50, largely because the global market remains well supplied and there has not been an immediate impact on trade flows. The conflict, however, comes at the same time the oil market is digesting other geopolitical instability, including Venezuela’s collapsing economy, ongoing conflict in Syria, and Libya and Nigeria attempting to boost their production levels despite domestic turmoil.

The situation in Qatar appears to be contained for now, but any turbulence in the Middle East can spiral out of control and lead to greater disarray, with large repercussions for the global oil market and world economy.

The Middle East is prone to volatility, and conflict there has affected oil supplies this decade, including the Arab Spring leading to major output losses in Libya and Syria. Last decade, the war in Iraq led to a fear premium in the oil market, while Iraq’s invasion of Kuwait in the early 1990s caused a brief price spike. Before that, from 1980-88, Iraq and Iran fought for years but oil supply was not affected. The situation in Qatar appears to be contained for now, but any turbulence in the Middle East can spiral out of control and lead to greater disarray, with large repercussions for the global oil market and world economy.

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