“This Is Much More Than A Spat”: What The Qatar Crisis Means For Global Energy Markets

We and quite a few others have spent a lot of time discussing the spat between Qatar and its neighbors.

As noted first thing Monday morning, Qatar’s finance minister wants you think there’s nothing to see here. It’s “business as usual in Doha,” Ali Shareef Al Emadi told CNBC.

“Our reserves and investment funds are more than 250 percent of gross domestic product, so I don’t think there is any reason that people need to be concerned about what’s happening or any speculation on the Qatari riyal,” he added. “We are extremely comfortable with our positions, our investments and liquidity in our systems.”

And then he made a fun threat:  “A lot of people think we’re the only ones to lose in this. If we’re going to lose a dollar, they will lose a dollar also. “We are going to make sure that we are even more diversified than we were before.” For more on the dollar crunch and “diversification,” see “‘Send Your Savings To Me Now’: Qatar Hit With Dollar, Food Shortage Amid Bank Squeeze.”

Be that as it may, there’s no denying that this is a tenuous situation and there’s little question that if the goal was to somehow impede Iran’s progress in expanding its regional influence, it’s probably fair to say that effort has backfired spectacularly as outlined in the linked post above and also in “Did The Saudis Make A Huge Mistake? Qatar Move Backfires As Iran Steps Up.”

One of the big unknowns here is what, if any, effect this will have on the OPEC production cut agreement and on energy markets more generally. Of course all sides are saying the agreement won’t be derailed, but that seems far-fetched. I mean it may not fall apart completely, but to say they’ll be no impact whatsoever seems like a patently absurd suggestion.

The rhetoric out of Riyadh and Moscow with regard to the ever-elusive “balancing of global markets” remains the same despite the fact that rising US production and overflowing inventories continue to weigh (heavily) on sentiment.

“The deal to curb production and balance an oversupplied market will achieve its objective in the first quarter of next year,” Russian Energy Minister Alexander Novak said Monday in Astana, Kazakhstan. Those sentiments were echoed by Khalid Al-Falih, who told the joint news briefing that inventories were declining worldwide and reductions would accelerate in the next several months.

Whatever. All we know for now is that crude has fallen for three straight weeks and that, to quote Amrita Sen, chief oil economist for Energy Aspects Ltd. in London, “sentiment in the market is still very bearish.”

Well late last week, BofAML was out with a pretty comprehensive look at the situation that I think deserves a skim. Excerpts are presented below.

Via BofAML

Geopolitical energy risks on the rise

The spat between Saudi, UAE and Qatar raises questions…

As geopolitical tensions build, it is important to keep focus on the economics. And the economics in the Middle East do not look great. Despite the recent agreement to support global oil markets, OPEC has seen a complete collapse in oil revenues in recent years. When looking at the cartel’s total intake in nominal dollars, revenues have fallen from a high of $1,200bn in 2012 to $400bn last year (Chart 1), bringing enormous pressure on government budgets and consumer spending across oil exporters. In particular, it is important to note that these petrodollars are now barely able to cover rising military spending. As an example, Saudi, UAE, Iran or Oman currently allocate an enormous percentage of their government budgets to defense spending (Chart 2), a figure they can hardly afford at current oil price levels.

…and could have profound implications for energy markets

The tight budgetary situation across the Persian Gulf, coupled with a resurgent Iran and a huge foreign policy U-turn in Washington all have important implications for global energy markets. The latest incident, whereby a group of oil-producing Arab nations has cut ties with neighboring energy-exporting country Qatar, is much more than a simple diplomatic spat. Air, sea and land links connecting people and goods across the countries involved have been cut. Collectively, the countries involved control 29% of global crude oil and 33% of global liquid natural gas exports (Chart 3). After all, Saudi Arabia is the world’s largest crude oil exporter, while Qatar is the world’s largest Liquid Natural Gas (LNG) supplier (Chart 4).

Not everyone in GCC agrees with Trump’s hard line on Iran

The decision to break links with Qatar comes from the perception that the emirate has financial links to a number of Shia countries and groups in the region. Specifically, the big shift in American policy toward Teheran may have helped trigger the decision by Saudi, Emirates, Egypt and Bahrain to break ties with Qatar. One of the key Saudi and UAE concerns is that the Iranian economy has been on a recovery path since sanctions were lifted 18 months ago (Chart 7), enabling the expansion of Persian influence to neighboring countries. A tiny population with an enormous wealth, Qatar has historically projected an outsized influence on regional and global affairs. So it does not help that regional differences in per-capita income are staggering, with Qatar at the helm (Chart 8).

Yet new geopolitical tectonic shifts should not be ignored

Besides the political bickering, the issue affecting the global oil market today is that government budget deficits as a % of GDP across the Middle East are skyrocketing (Chart 9). While defense is an important portion of the budget, other pieces, like social transfer payments and infrastructure spending, are also critical contributors to the soaring funding gaps. Moreover, the current account positions of some key Middle East countries seem untenable (Chart 10) in the long run. The long-standing currency pegs have partly worked because of OPEC’s ability to retain some control of the oil market, but the pressure keeps building.

Three energy outcomes are possible: bullish, neutral, bearish

The recent diplomatic clash could evolve into a few possible outcomes that may have important consequences for energy markets (Table 4). True, it is very possible that, after some political arm-wrestling, we see a de-escalation of tensions that involve no use of military force, keeping Brent prices in a $47-55/bbl range. However, we also think that there is a non-trivial chance that the incident escalates further, triggering an ugly unraveling of the OPEC deal, pushing Brent back down to a $35-40/bbl level. Last, while highly unlikely in the next three months, given America’s focus on North Korea, it is also possible that this move is the first in a set of events that leads to use of force among major exporters in the Persian Gulf. Needless to say, Brent prices would quickly jump into the $60-70/bbl range and possibly much higher.