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Oil Markets Unmoved By Brewing Conflict In The Middle East

Doha

The political standoff in the Middle East between Qatar and other powers in the Middle East enters its third week, and the conflict shows no signs of abating.

On June 5, Saudi Arabia, Egypt, the UAE and Bahrain cut diplomatic ties with Qatar and also tried to close off entry to Qatar by land, sea and air. They argued that Qatar is a major funder of terrorism.

U.S. President Donald Trump backed the move. “The nation of Qatar, unfortunately, has historically been a funder of terrorism at a very high level, and in the wake of that conference, nations came together and spoke to me about confronting Qatar over its behavior,” Trump said on June 9. “I decided, along with Secretary of State Rex Tillerson, our great generals and military people, the time had come to call on Qatar to end its funding -- they have to end that funding -- and its extremist ideology in terms of funding.”

Of course, there is much more to the spat than Qatar’s terrorism links – the tension between Qatar and Saudi Arabia goes much deeper. Qatar supported the Arab Spring uprisings in 2011, sparking the intense ire of the various monarchies and authoritarians in the region. Qatar has a friendly relationship with Iran, a major rival of Saudi Arabia. There is also just a plain old competition for power in the region. Needless to say, it’s complex.

Tensions are heating up. In a show of force, Qatar held military exercises on June 19 with Turkish troops.

As is often the case with the Trump administration, there have been mixed signals from Washington. President Trump has strongly supported the isolation of Qatar over its alleged funding of terrorism, ignoring the fact that although the relationship is complicated, Qatar is an ally of the U.S. in many ways. Not only does the U.S. have a large military base in Qatar, Qatar is also home to the U.S.’ regional Central Command headquarters. The location is critical to the U.S.’ campaign to fight ISIS, among other security objectives. Moreover, the Pentagon just signed off on a $12 billion weapons deal to Qatar last week. Shortly after Trump’s public comments, the Pentagon felt the need to issue a statement thanking Qatar for hosting 10,000 U.S. troops. Related: Daimler vs Tesla: The Electric Truck War

The U.S. has friends and military assets on both sides of this fight, which likely means that Washington will try to ratchet down tensions, despite President Trump’s comments. Recognizing the gravity of the situation, U.S. Secretary of State Rex Tillerson cancelled a planned trip to Mexico in order to try to deal with the conflict.

For now, the struggle has not yet led to a major disruption in the flow of oil and gas. Qatar Petroleum said in recent days that it would not cut off natural gas exports to the UAE, despite having the legal option of doing so. "The siege we have today is a force majeure and we could close the gas pipeline to the UAE," Qatar Petroleum’s CEO said on Al Jazeera on June 18. "But if we cut the gas, it does great harm to the UAE and the people of the UAE, who are considered like brothers ... we decided not to cut the gas now," he told the Doha-based channel in an interview aired on Sunday.

But regional experts do not see this conflict going away anytime soon. A protracted battle raises the chances of escalation into tit-for-tat reprisals that ultimately lead to some sort of supply disruption. Qatar is the largest LNG exporter in the world and is also a non-trivial oil producer and a key member of OPEC. Qatar recently rerouted some LNG tankers away from Egypt’s Suez Canal.

A broader regional conflict would have huge implications for oil prices, although whether positive or negative remains to be seen. The bullish case is more obvious: any supply disruption would push up oil prices, and the effect on LNG markets would likely be even greater. An outright hot war between multiple Middle Eastern countries – for now a remote possibility – would be catastrophic. "If the conflict develops into a military confrontation ... I would expect a very large spike in prices to around $150 a barrel of oil," Jean-Francois Seznec of the US-based Atlantic Council's Global Energy Center, told Al-Jazeera. Related: Oil Sands Output Growth Second Only To Shale

The bearish case is more counter-intuitive, although quite obvious once you think about it. A regional conflict, particularly if tensions between Saudi Arabia and Iran pick up, could lead to the breakdown of cooperation within OPEC. That is, everyone starts producing as much as possible again. That would be decidedly negative for oil prices.

Still, it is hard to imagine a Saudi military incursion into Qatar without the consent of Washington, which makes U.S. policy crucial. News that Sec. of State Tillerson is prioritizing de-escalation is a positive sign that things won’t spin out of control.

Perhaps that is why the oil markets have thus far responded with a shrug to the brewing conflict in the Middle East.

By Nick Cunningham of Oilprice.com

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  • Erin on June 20 2017 said:
    No one wrote article after article on the consumer's plight when gas was over $4. The oil companies were shoveling in the money with $100'oil. Energy stocks were keeping Wall Street happy. So what's all the commotion about? Companies are still making money, but you would think the end of the world was coming with all these dire reports., the consumer is benefiting but no one ever mentions this.
  • JL Eaton on June 20 2017 said:
    I agree with the bearish price scenario, if S.A. and Iran's conflict initially leads to a breakdown in OPEC's production curtailment. However, if those two countries ever heat up to a direct shooting war, they will almost certainly find cause to target their respective ballistic missiles at each other's oil fields. And that could change supply dynamics passing through the Straits of Hormuz in a radical way.
  • Bill Simpson on June 20 2017 said:
    The 'blockade' is trivial. Nether side will start a war with the other. The leaders are both too soft and living too well.
    Syria and Iraq is what should concern the oil market. We just shot down the second Iranian drone, after shooting down a Syrian piloted jet. Statements issued by the US command use phrases like, "We will use whatever means necessary to protect friendly forces..."
    There is no agreement, or plan, on what happens after the forces of the Islamic State are defeated. Iran intends to establish a land corridor from Iran to Damascus, in order to ship vast quantities of weapons into Syria, with the long term intention of erasing Israel from the map. If you watch the numerous videos coming out of Yemen, and other Iranian proxies in the area, you will hear the phrase, 'death to America, death to Israel' repeated in hundreds of them. The leader of Iran has said many times that Israel will be removed from the map. He is slowly taking steps to fulfill his threats.
    Russian and Iran are allied in trying to eventually take over the oil fields in the Middle East so as to basically control the world economy. Putin is in his 60's, not in his, 80's, so he has plenty time as dictator of Russia to get it done. Putin will run Russia until he dies. Anyone interfering with that will be killed, like the guy he just shot outside the Kremlin.
    The United States is an ally to the other side, Israel and, 'the Saudis with the oil'. It is doubtful that the US will watch Iran enact its corridor plan. That means war between the Assad/Iran/Russia side, and the US side, since they won't agree to stop advancing into areas taken by forces friendly to the United States.
    In short, a major regional war could begin in Syria at any time. All it would take is the downing of a US, or Russian jet. Anyone who believes that Trump, especially in his first term, will just sit by and let US jets be shot down without his famous 'counter punch' hasn't studied Trump, or heard Sir Richard Branson describe how Trump discussed how he would get even with 5 people who refused him a loan, over lunch many years ago. Russian gets one of ours, Trump will get two of theirs. Guess where that ends. The conflict in the Middle East is only beginning.

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