Escalation of sectarian conflict and violence in the Middle East could derail oil supplies from the region and lead to a spike in prices, according to a report by Vandana Hari, founder of Vanda Insights. But the decision of Saudi Arabia and three other Arab countries to cut off most diplomatic and economic ties with Qatar is unlikely to lead to such a scenario, she adds.
Saudi Arabia, Bahrain, the United Arab Emirates and Egypt said they will halt air, sea and land travel to and from Qatar due to its alleged ties with Iran and Islamist groups in the region. The WTI active contract rallied sharply to as much as $48.42 per barrel after the announcement before falling to around $48 per barrel.
The risk would be Qatar walking away from the agreement with OPEC nations to curb its supply from 6.48 lakh barrels per day. This could lead to higher supply and a downward pressure on oil prices. However, Qatar’s “incremental production of 30,000 barrels per day is small in comparison to the nearly 1.8 million barrels per day of cuts being implemented under the OPEC/non-OPEC deals”, the report points out.
In another ‘Oil Viewsletter’, Hari highlights some key factors which could impact oil prices:
- Expect price correction if there is a drawdown in global oil stocks from April. There is skepticism in the market if the production cuts are as deep as being reported.
- Market sentiment impact with Libya and Nigeria being exempt from the OPEC cuts. Libya was seen adding nearly 3 lakh barrels per day while Nigeria output was up at 1.5 million barrels a day.
- U.S. crude stocks have declined eight weeks in a row. The all-time high touched on March 31, 2017 stood at 535.5 million barrels with current stock of 25.6 million barrels.
- Export-import data from the U.S. is in favour of the bears. For the week ended May 26, imports stood at 7.99 million barrels per day compared to exports of 1.3 million barrels a day.