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After Initial Jolt Over Qatar Tensions, Energy Markets Settle

posted onJune 6, 2017
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As Saudi Arabia and four other Arab states cut diplomatic ties with Qatar on Monday, the threat to the oil markets will depend on whether tensions translate into disruptions.

The flare-up in the Middle East adds to the instability in the world’s most important energy-exporting region. Saudi Arabia is the biggest exporter of crude oil, while Qatar is home to substantial natural gas resources.

But a diplomatic dispute will not necessarily cut into supplies, provided tensions in the region do not escalate. Amid a global glut, other countries could easily step in to fill the void.

Investors seem to be calculating that. While oil prices initially spiked 1.6 percent on Monday, the markets quickly fell back to just above $50 a barrel.

“In the Middle East, there is politics and then there is business,” said Chase Untermeyer, who served as the American ambassador to Qatar in the George W. Bush administration. “And business tends to keep on going regardless of political scrapes.”

At present, the markets are digesting an oversupply of crude oil, which has kept prices low for more than two years. Saudi Arabia and other major oil-exporting nations are trying to keep supplies in check, but American shale companies continue to ramp up production.

Qatar, a member of OPEC, helped broker last year’s agreement by the cartel and by other producers, like Russia, to trim output in an effort to soak up supplies. The parties agreed last month to extend the cuts for nine months.

A small country with only 2.2 million residents — many of whom are not citizens — Qatar occupies a strategic position, jutting into the Persian Gulf from the Arabian Peninsula. Qatar has a border with Saudi Arabia and shares the world’s largest natural gas field with Iran.

Qatar is a relatively small oil producer with output of about 620,000 barrels a day in April, less than 1 percent of world supply. But the country is a world power in natural gas.

Through partnerships with Exxon Mobil, Royal Dutch Shell, Total and other companies, Qatar has built major infrastructure for chilling natural gas into liquid form so that it can be exported on ships. Qatar was the world’s largest exporter of liquefied natural gas last year, accounting for nearly 30 percent of supplies, according to the consultancy group Wood Mackenzie.

Gas has helped make Qatar one of the world’s richest countries per capita. The government has used the steady flow of cash to intervene in regional disputes and to finance activities like the broadcast network Al Jazeera, actions that often annoy its Arab neighbors.

The diplomatic crisis comes at a difficult time for Qatar’s economy. Over the last two years, Australia’s mushrooming liquefied gas exports have increasingly crowded out Qatari gas meant for Japan, South Korea, China and other growing Asian markets.

That squeeze — coupled with weak energy prices and exorbitant spending in preparation to host the 2022 World Cup — has driven up Qatar’s debt. Last month, Moody’s downgraded Qatar’s credit ratings below those of several Gulf states. Even before this diplomatic row, the country’s economy was expected to grow only about 2 percent this year.

As Arab neighbors sever ties, the move could most immediately damage the premier national airline, Qatar Airways. The airline will no longer be able to fly over Saudi and Egyptian airspace to Europe. While alternative routes will probably be established over Iran and Turkey, added flight times will almost certainly hurt ticket sales, to the benefit of its competitor, Emirates Airlines.

“If this continues for any length of time it will have implications for the Qatari economy,” said Richard Mallinson, a geopolitical analyst at Energy Aspects, a research firm. “The question is, do calmer heads prevail and do we see work to de-escalate.”

Natural gas is the economic unknown.

Qatar’s leaders realized decades ago that they had to bring in foreign investors to gain access to the capital and technology needed to take advantage of their major natural gas deposits. Shell has pumped about $20 billion into an enormous facility, while Exxon Mobil is probably Qatar’s most important partner with stakes across the country’s natural gas industry.

“I would think both are pretty worried,” said Trevor Sikorski, a gas analyst at Energy Aspects, a London-based research firm.

Shell and Exxon declined to comment.

Any disruptions depend on whether the diplomatic rift deepens — a crucial variable as companies decide whether to invest more in Qatar.

Saudi Arabia in 2011 sent troops into Bahrain to bolster the ruling family, which was facing unrest. Some analysts worry that Egypt could block Qatari exports from going though the Suez Canal.

But such actions seem unlikely at this point. The Saudis, for one, are already wrestling with several foreign entanglements, particularly the war in Yemen.

“Nobody is going to meddle with their oil and gas fields,” said Sadad Ibrahim Al-Husseini, former executive vice president of Saudi Aramco. “The issue is they are not going to have any luck selling their gas within the Gulf region.”

Qatari gas exports that previously went to Asia are expected to be diverted to Europe. But Qatar will probably be squeezed again, as American supplies are expected to rise over the next year or two as new export terminals come online.

Qatar has tried to compensate for lost markets by exporting more gas to Middle Eastern markets. But the new political tension will hurt those efforts.

“The prospects for future Qatari gas exports to adjacent markets have been reduced to less than zero,” said Mr. Al-Husseini.

Via [NYT]