Navarik Market Update
June 6, 2017
OPEC powerhouses Saudi Arabia and the United Arab Emirates (as well as other allies) severed diplomatic ties with fellow cartel member Qatar on 4 June, ostensibly over financial and logistical support for terrorism as well as regional rival states such as Iran. A diplomatic crisis grew into an economic one when Saudi and UAE ports were closed to vessels coming from Qatar. Since vessels often co-load crude in Qatar before heading to these ports, as well refuel in Saudi waters, this at first glance creates a huge barrier for Qatari exports.
However, three factors should moderate effects on global energy markets. The first is that the blockade mostly affects oil flows, and although Qatar is a major gas supplier, it is a much smaller oil producer. The second is that this blockade should not affect east-ward trade to Asia, which accounts for a vast majority of Qatar’s gas exports. And thirdly, it only affects flows by boat; early reports indicate that pipeline flows (including the crucial Dolphin pipeline) have not been curtailed.
Oil prices initially jumped on the possibility of a supply-side shock, before settling on the realization that the spat could undermine the mutual compliance to OPEC’s cuts. Gas prices have so far sustained their jump, and this could be a deliberate feature. Part of the reason global oil prices have been so low is competition from natural gas, whose prices have fallen due to the shale revolution. Since natural gas is both a by-product of tight oil and a substitute for it, the more unconventional oil the US drills despite low oil prices, the more natural gas they produce (all else being equal); and the more natural gas they produce, the lower the natural gas price falls, incentivizing consumers (including utilities) to use natural gas, keeping oil prices low and the cycle continues.
Qatar is an easier target to increase the price for natural gas and indirectly choke off US tight oil production and allow OPEC cuts to take effect. From OPEC’s perspective, this would amount to a switch from a “vicious cycle” into a “virtuous circle”, but in order to take hold, the market needs to believe that this disruption is much more than a blip. Yet if natural gas prices increase enough, more producers might find their operations economically viable and flood the market anew. Likewise, cost-effective unconventional oil drillers would also see a profit boost if the oil price rises, and probably not dial back either. This was a blunt tool to hit a precise target.
Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.
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