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Why Gulf-Qatar tensions mean little for energy prices

LiveMint logoLiveMint 06-06-2017 Tadit Kundu

Should we worry about the impact of the Gulf-Qatar tensions on energy prices? The short answer is: not if history is any guide.

The last time when hostilities in the Middle East led to a sustained increase in oil prices was in 1979-80. Oil prices remained elevated throughout the first five years of the 1980s, as two major oil producers—Iran and Iraq—remained engaged in a protracted war which often spilled over to the sea and disrupted oil tanker movement. But prices began to subside by 1986, while the war raged on for another two years until 1988. What gives? The plunge in oil prices in 1986 was owing to the increase in oil output by Saudi Arabia and its Gulf neighbours, who sought to increase their market share while Iraq and Iran were fighting.

It’s worth noting that since then, oil markets have seldom panicked at hostilities that periodically erupted in the Middle East region. Even the reaction to the 1990 Gulf War was short-lived, lasting not more than a few months. More recently, despite the onset of Arab Spring in 2011, markets have largely remained sanguine. In fact, the rise of arguably the most disturbing and violent group in the Middle East, the ISIS, coincided with the steep fall in crude oil prices in mid-2014 (See chart).

Graphic: Prajakta Patil

Accordingly, there is no reason to assume that the current tensions between Qatar and its energy-rich Gulf neighbours (like Saudi Arabia and UAE) should necessarily lead to higher oil or gas prices.

Geopolitical tensions and hostilities between major oil producers can have two opposite effects on the oil market, depending on whether the global oil market is tight or is in surplus. When the market is tight, then geopolitical tensions can raise prices as markets are jittery over possible supply disruptions. However, under surplus market conditions, tensions among producers mean that they are unlikely to cooperate among themselves to limit output and push prices up.

Countries might compete against each other to capture more market share and hence push down prices even lower.

This might explain the fact that despite increasing geopolitical rivalry between Saudi Arabia and Iran in the last few years, crude oil prices have remained largely subdued, especially when compared to pre-2015 levels. That’s apart from the looming threat of US shale oil production.

Coming back to Qatar, while it is an Opec (Organization of the Petroleum Exporting Countries) member, it is a small crude oil producer. Bloomberg data shows it pumped 620,000 barrels per day in May 2017, contributing around 0.6% to global oil production.

However, from an overall price perspective the Qatar tension is negative, says Sugandha Sachdeva, assistant vice-president and in-charge (metals, energy and currency research) at Religare Securities Ltd, adding that this can create a rift in between the Opec cartel and undermine the chances of future deals with regards to production cuts.

Qatar is an important natural gas supplier, accounting for about a third of the global liquefied natural gas (LNG) supplies. Will there be any impact on LNG prices then? There are two things to be kept in mind for LNG prices, says K. Ravichandran, senior vice-president and group head, corporate ratings, Icra Ltd. One, long-term LNG prices are governed by specific contracts and are typically linked to crude oil prices with a lag, so that may not be immediately affected.

Two, there may be an adverse impact on spot LNG prices, i.e. prices might rise, as the market could be anticipating tightening of supplies. However, it helps that LNG prices are already softer thanks to the glut in the global LNG market, pointed out Ravichandran.

What’s the impact on Indian oil & gas firms?

LNG importer, Petronet LNG Ltd has said it does not expect its LNG supplies from Qatar to be affected. Nitin Tiwari, analyst at Antique Stock Broking Ltd points out, “Until and unless economic sanctions are imposed which potentially disrupt transactions, this (the Qatar-Gulf dispute) is hardly a problematic situation.” The Petronet LNG stock had shed 2% on Monday, but is trading higher on Tuesday.

For oil producers such as Oil and Natural Gas Corp. Ltd and Oil India Ltd, the development amounts to nothing given oil prices haven’t reacted and, as mentioned earlier, may not react dramatically. For perspective: on Monday, Brent crude fell 0.96% to close at $49.47 a barrel and on Tuesday, it was trading up 0.26% to $49.60 a barrel at 11:53am. Clearly, at this point in time, this is not a significant event for energy prices.

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