Why Oil Prices Won’t Spike After Saudi Arabia-Qatar Row

Qatar walking away from agreement with OPEC nations to curb its supply from 6.48 lakh barrels per day is the risk.

Representational image of an oil field. (Photo: iStock)

Escalation of sectarian conflict and violence in the Middle East could derail oil supplies from the region and lead to a spike in prices, according to a report by Vandana Hari of energy markets researcher Vanda Insights.

But the decision of Saudi Arabia, and three other Arab countries, to cut off most diplomatic and economic ties with Qatar, is unlikely to lead to such a scenario, she adds.

Six nations severed diplomatic relations with Qatar due to its alleged ties with Iran and Islamist groups in the region.

The WTI active contract rallied sharply to as much as $48.42 per barrel after the announcement, before falling to around $48 per barrel.

The risk would be Qatar walking away from the agreement with OPEC nations to curb its supply from 6.48 lakh barrels per day. This could lead to higher supply and a downward pressure on oil prices.

Qatar’s incremental production of 30,000 barrels per day is small in comparison to the nearly 1.8 million barrels per day of cuts being implemented under the OPEC/non-OPEC deals.

Report

In another ‘Oil Viewsletter’, Hari highlights some key factors which could impact oil prices:

• Expect price correction if there is a drawdown in global oil stocks from April. There is skepticism in the market if the production cuts are as deep as being reported.
• Market sentiment impact with Libya and Nigeria being exempt from the OPEC cuts. Libya was seen adding nearly 3 lakh barrels per day, while Nigeria output was up at 1.5 million barrels a day.
• US crude stocks have declined eight weeks in a row. The all-time high touched on 31 March 2017, stood at 535.5 million barrels with current stock of 25.6 million barrels.
• Export-import data from the US is in favour of the bears. For the week ended 26 May, imports stood at 7.99 million barrels per day, compared to exports of 1.3 million barrels a day.
• While the reins are in the hands of the bears, oil prices could see some volatility going ahead.

(This article was first published on BloombergQuint)