On Monday, leading Arab countries – including Saudi Arabia, Egypt, Bahrain, and the United Arab Emirates (UAE) – cut diplomatic ties with Qatar. Qatar is accused of supporting and financing radical Islamic terrorists.
The political turmoil between the Arab states could negatively affect the recent Organization of the Petroleum Exporting Countries’ (OPEC) agreement to extend oil production cuts until March 2018.
As a response, oil prices dropped Tuesday morning. Benchmark Brent crude oil LCOc1 dropped 20 cents a barrel, down to $49.27. U.S. light crude CLc1 also dropped 20 cents a barrel, down to $47.20.
Qatar is the lowest OPEC producer of crude oil, only producing roughly 620,000 barrels per day. Several Qatar sources still assure that the country will stick to the OPEC agreement to restrict oil production despite diplomatic tensions.
Industry experts, including the managing director of the consulting firm JBC Energy out of Vienna, David Wech, remain optimistic, “We do not see too much cause for concern at this point regarding potential risk to the OPEC-led supply accord currently in effect.”
There is more concern with oil prices because of the rising U.S. crude production, which has risen over 10 percent since last summer. William O’Loughlin, an analyst at Rivkin Securities states that, “The relentless increase in U.S. oil production appears to have the market worried that the OPEC cuts will be completely nullified by the increased U.S. production.”
While Qatar isn’t a large supplier of crude oil, it is the world’s largest supplier of liquid natural gas (LNG). The Arab states that broke ties with Qatar are also some of the country’s biggest LNG customers. Egypt purchases up to 60% of its yearly LNG supply from Qatar.
The UAE also purchases a significant amount of LNG from Qatar. The ban is forcing sellers like Royal Dutch Shell to dig into its global portfolio to find suppliers of LNG for Dubai.
Another concern with the ban against Qatar is with the port of Fujairah in the UAE. The port lies near the Strait of Hormuz, which ships pass through on the way Asia, Europe, or the United States. This port is a major refueling point for crude oil and LNG tankers, making it a very important port for global energy.
Tankers flying the Qatar flag are now forced to travel as far as Singapore or Gibraltar to refuel since they are banned from the port of Fujairah, which could possibly increase costs and delay deliveries.
There is also concern that Qatar tankers might not be allowed to go through the Suez Canal, even though Cairo has made no official statement on the subject. Qatar vessels would have to sail around the tip of Africa if they aren’t allowed to use the Suez Canal. This would add a month to the shipping time, causing European customers to rely on Russian gas, which could start more diplomatic headaches and market disruptions.
For now, the world waits to see how the tensions between the Arab states will play out.
Article written by HEI contributor Raymond Arrasmith.