All eyes on oil amid diplomatic breakdown with Qatar

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 U.S. 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 of Iraq and the Levant and al- Qaida, and accusing it of trying to destabilize their respective governments. The nations 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. She noted that Qatar remains part of the coalition supporting the OPEC 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. But 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 pulled back as the market shifted its focus to the challenging fundamental outlook.