Hundreds of millions of people all over the world were stunned when Saudi Arabia, Egypt, the United Arab Emirates and a number of other countries suddenly cut ties with Qatar. The crisis was exacerbated when these countries severed air and land travel routes to the small Middle Eastern nation.
Given the fact that Qatar is a member of OPEC as well as the world’s largest liquid natural gas exporter, many traders are wondering how this recent political development will impact oil and LNG prices. Here are a few scenarios that could play out in the coming weeks.
Scenario #1: Little to No Effect
The Middle East has hardly been a stable region throughout the last few decades. Companies and traders alike know that tensions can easily arise between two or more Middle Eastern countries, and are thus not taken aback when it happens.
In fact, tensions can play a positive role in keeping prices low as countries fighting each other won’t come to an agreement to slow production in order to keep prices artificially high.
Even more importantly, history shows that turmoil does not have to affect energy prices, because other countries are often willing to step up production to make up for lost output from one or more other partners. What is more, the fact that there is currently an oil and LNG glut on the market is almost certain to keep prices steady as Arab governments and businesses don’t have to worry about any impending shortages.
While there is a possibility that Qatar may ban oil and LNG shipments to countries that have fallen out with it, even this move might not have a global effect on oil and gas prices. The extra oil and gas that Qatar stops shipping to countries such as Egypt would likely be shipped to Europe.
From there, companies that supply Middle Eastern countries would purchase it and sent it to its client companies and states.
Scenario #2: A Serious, Long-Term Effect
It is important to realize that the political current crisis could boost oil and gas prices for the foreseeable future. Without a doubt, the current diplomatic row is far more serious than other, similar disagreements between Qatar and the Gulf States.
In addition to cutting off travel to and from Qatar, Saudi Arabia has also ordered its lenders not to increase exposure to Qatari borrowers. The United States government has involved itself in the dispute by praising Saudi Arabia’s actions, and calling Qatar a supporter of terrorism. There are no signs that the row is de-escalating, even though U.S. Secretary of State Rex Tillerson is calling on all sides to sit down and work things out.
Oil and gas markets are already jittery, as is evidenced by the fact that the value of U.S. oil rose by 1.6% when news of the story broke. While its value fell just a bit later, it would not take much for the cost to rise again. A market that remains this unpredictable and unstable for a prolonged period of time may cause oil prices to rise as speculators fear they can no longer trust Gulf oil suppliers to provide reliable access to these resources.
It should also be noted that international investors and bankers may consider the entire Gulf region to be risky, and thus start pulling out of or at least avoiding investments in countries involved in the dispute. This would affect oil prices in particular, and would come at a bad time for countries such as Saudi Arabia which are already dealing with lost revenue due to long-term low oil prices. Qatar would naturally be affected as well; however, the country does have over $300 billion in its sovereign wealth fund, and may not be decimated by a loss of foreign cash.
Given the fact that this crisis just broke less than a week ago, it is almost impossible to determine just how things will end up. At present, there seems to be no cause for concern as there is plenty of natural gas and oil on the market to keep prices stable. However, it is a situation that any investor will want to keep a close eye on as the situation could escalate quickly and lead to higher oil and LNG prices both now and for the foreseeable future.
Regards,
Ethan Warrick
Editor
Wealth Authority
