Crude oil prices are getting a look at terror premium as four Arab Gulf States, led by Saudi Arabia, cut diplomatic ties with Qatar as another terror attack takes place on the streets of London. Terror is becoming a top issue around the globe as ISIS took responsibility for the slaughter on London Bridge.
The Saudis said the action to break off relations was taken because of Qatar’s "embrace of various terrorist and sectarian groups aimed at destabilizing the region" and it's clear they are talking about not only rouge groups, but Iran-backed groups like the Muslim Brotherhood, al-Qaida and ISIS. Bahrain, Egypt, and the United Arab Emirates joined the Saudi move that Qatar says is being taken because of "baseless accusations”. Qatar’s backing of Iran on many issues is causing strain in relations between OPEC members. For energy, the way this plays out, can have large impact on prices.
While Qatar is not a major oil producer, they are one of the world’s largest providers of liquefied natural gas (LNG). Also, Qatar is a peninsula right in the Persian Gulf, the center of key oil transportation points. The country borders Saudi Arabia and the islands of Bahrain are just off its coast and any conflict in the region could disrupt the movement of supply.
Saudi Arabia, United Arab Emirates, Bahrain, Egypt are withdrawing all diplomatic staff and are halting flights to Qatar’s capital Doha as tensions impact oil. As the news broke, oil rallied but sold off after it realized that there is not an imminent threat to supply of shipments. Still, with tensions this hot, we must monitor the situation.
The Wall Street Journal reports that, "Qatar is the world’s largest exporter of liquefied natural gas. In 2016 it shipped out around 77.2 million tons of the super-chilled gas, equivalent to about one-third of global supply, according to the International Gas Union. Most of Qatar’s gas is located in its massive offshore North Field: Only Russia and Iran have more proven gas reserves, according to BP ’s Statistical Review of World Energy. To date, there is no indication that Qatar’s gas exports, which are mostly loaded up on ships before heading off around the globe, will be impacted by its row with neighboring Saudi Arabia. Major customers for Qatar’s gas are based in Asia—Japan sources around 15% of its gas from Qatar, while act that Qatar, a member of the Organization of the Petroleum Exporting Countries, isn’t actually a major petroleum producer. It accounts for around 2% of the cartel’s output, shifting 618,000 barrels a day in April. China and India are also big customers.”
Oil may also have to get ready for another crude supply drawdown. OPEC cuts are starting to be felt and we should see crude supply fall by another 4 million barrels this week. Consider that over the last two months U.S. oil supply in storage (including the Strategic Petroleum Reserve) fell by a record 30 million barrels.