All eyes on oil amid Qatar rift

Saudis, others cut relations

Energy markets were volatile and Qatari stocks sold off Monday as investors weighed the impact of a diplomatic spat that could have major consequences for the Middle East economy and United States strategy in the region.

In an unexpected move, Saudi Arabia, Egypt, the United Arab Emirates and Bahrain all cut relations with Qatar, unanimously citing the tiny nation’s ideological and financial support for the Muslim Brotherhood, Islamic State and al-Qaida, and accusing it of trying to destabilize their respective governments.

The four countries banned travel and shipping to and from Qatar, and will expel all Qatari citizens, among other measures.

Despite early gains for oil, prices moved back well below US$50 per barrel.

And while there appear to be no immediate implications for Qatar’s participation in the recent OPEC deal to cut production, the dispute does present other strategic challenges.

“The breakdown in relations between Qatar and the Gulf Cooperation Council (GCC) has critical implications for the U.S. and Libya,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. “In our view, there are no immediate risks for regional energy security, but the breakdown does pose the risk of an intensified proxy battle in Libya and possibly may even have implications for the U.S.’s forward airbase in Qatar.”

Croft believes it is unlikely that Egypt will close the Suez Canal to Qatari tankers, and efforts to disrupt Qatari shipments will have a marginal effect. The strategist also noted that Qatar remains firmly part of the coalition supporting the OPEC production cuts.

“I think it’s still going to be a bit of a debate on the true impact it can have on the oil market,” said Olivier Jakob, a strategist at Petromatrix. “In terms of oil flows it doesn’t change very much but there is a wider geopolitical impact one needs to consider.”

Qatar’s crude output capacity is only about 600,000 barrels per day, making it one of OPEC’s smallest producers. However, any tension within the oil cartel may hurt prices if the supply deal appears less stable.

Crude rose about 60 cents US in early trading as markets interpreted the Saudi-led move as a sign of increased tension in the region. However, oil prices quickly pulled back as the market shifted its focus back to the challenging fundamental outlook, which has kept WTI below US$50 per barrel for much of the past three months.

“Trading action suggests that so far markets see this as more of a diplomatic tiff … that likely won’t impact a global energy market that currently is well supplied,” said Colin Cieszynski, chief market strategist at CMC Markets (Canada).

Other parts of the market will likely see a much bigger impact, as reflected in the more than seven per cent selloff in Qatar’s benchmark equity index. Qatari stocks lost more than US$8 billion in value, marking the biggest decline since late 2009 during the global financial crisis.

The energy and materials sectors were the biggest laggards, as the changes may cause disruption in the liquefied natural gas (LNG) market. Qatar supplies approximately a third of global LNG, and Saudi Arabia, the UAE and Egypt are heavily reliant on its gas via pipeline and LNG.

Every sector was in the red, yet financials were in focus, as some Egyptian banks stopped dealing with Qatari institutions, and Saudi and UAE banks awaited regulatory guidelines.

Masraf Al Rayan QSC, is a Qatar-based Islamic bank, was among the biggest decliners, shedding approximately 10 per cent of its value.

The indiscriminate selling of Qatari stocks suggests government-related enterprises may move in to support the market in the coming days, but the negative impact on industries such as transportation, for example, will be severe if the situation persists. Privately-held Qatar Airways can no longer fly to some of the Middle East’s biggest markets.

“Blocking sea, air and land (routes) shows a credit-negative escalation. And we’re concerned that could have a credit impact if it disrupts trade and capital flows,” said Mathias Angonin, a senior analyst at Moody’s Investors Service.

Qatar is relatively wellpositioned to withstand the bloc’s economic pressure. Its sovereign wealth fund has an estimated US$335 billion in assets and it had a US$2.7 billion trade surplus in April. Its extensive port facilities also allow for business to continue despite the closure of the border with Saudi Arabia.