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Implications of Middle East Tensions on Oil

6 June 2017PoliticsEconomics

The new sanctions against Qatar are unlikely to disrupt the recent agreement by OPEC and its allies to extend their oil-production cuts for another 9 months into January 2018.

5 Arab States Cut Ties with Qatar

  • The governments of Saudi Arabia, Bahrain, UAE, Yemen and Egypt announced that they were severing diplomatic ties with Qatar over allegations that the latter is pursuing policies that are destabilizing the region, including support for regional jihadist groups and for Iran. Qatar denies these allegations.
  • In Citi analysts view, these developments appear more serious than the incident in 2014, when comments made by a Doha-based cleric sparked a row that resulted in a severing of diplomatic ties between March and November of that year.

This time, the sanctions against Qatar go well beyond the diplomatic, and include:

  • Closing of the land border between Saudi and Qatar;
  • Suspension of all flights between Qatar and its Gulf neighbours (Saudi, Bahrain, UAE, and Yemen);
  • Closing of these Gulf neighbours' airspace to Qatar's national carrier, Qatar Airways;
  • The expulsion of all Qatari nationals from their Gulf neighbours (effective in 14 days), and the withdrawal of their citizens from Qatar within the same time period.
  • It is not clear what is required of Qatar for these sanctions to be lifted, and it is therefore difficult to estimate how long they will remain in place. In 2014, it took eight months to resolve the row.

Implications on Oil

  • Oil prices finished lower on 5 June on concerns that rising tensions between OPEC (Organization of the Petroleum Exporting Countries) members could jeopardize the global production agreement. The West Texas Intermediate crude (WTI) fell 26 cents, or 0.6%, to settle at $47.40 a barrel. Brent crude slipped 48 cents, or 1%, to $49.47 a barrel. The settlements for both benchmark crudes were the lowest in just under a month.
  • In Citi analysts view, the new sanctions against Qatar are unlikely to disrupt the recent agreement by OPEC and its allies to extend their oil-production cuts for another 9 months into January 2018.
  • While Qatar is an OPEC member, it is not a significant crude oil producer. Qatar contributed just 2% to OPEC's April production. Citi analysts are still expecting WTI and Brent Crude to average $56 and $59 a barrel in 2017 as the impact of output cuts since January start to kick in.
  • Nevertheless, the situation remains fluid and Citi analysts are keeping a close watch on any escalating tensions. Citi analysts continue to believe that diversified portfolios can help investors navigate volatile markets.

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