Energy Monitor June – More tensions, minor impact

by: Hans van Cleef

  • Further tensions between Qatar and some Gulf countries increases risks…
  • …but for now impact on oil and gas prices remains limited
  • OPEC extended production cut agreement, but failed to impress markets
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Saudi dispute with Qatar has had no impact on oil prices…

The recent  increased tensions between a coalition of countries – led by Saudi Arabia – and Qatar will have no, or very limited, effect on oil and gas prices. The dispute was triggered by Saudi Arabia, which accused Qatar of supporting extremism in the region. Other countries (Egypt, Bahrain, Yemen and the UAE) joined the sanctions imposed against Qatar. The impact of the conflict resulted in a short-lived spike in oil prices before prices eased again. The pressure on oil prices was triggered by increased worries about OPEC’s compliance regarding its production-cut-agreement. If Qatar would not stick to its fair-share of production cuts, other OPEC members may not feel obliged to do so, resulting in a ‘failure’ of the production balancing act. We think this is very unlikely. Qatar is not a major oil producer. And even if Qatar decides not to cut production by the promised 30.000 barrels, other producers – most likely Saudi Arabia – will do a bit extra.

…and neither on gas prices

Qatar is the world’s third gas / LNG player, after Russia and Iran. Qatar shares a major gas field with Iran. This North-Field is the largest natural gas field in the world, producing 77 million tons of LNG or more than 10 billion cubic feet of gas per day. According to RasGas, the field has recoverable reserves of more than 900 trillion standard cubic feet – which is roughly 10% of the world’s known reserves. Since the early 2000’s, Qatar’s gas exports accelerated to record levels. This resulted in great wealth, which made Qatar – by far – the richest country in the world (annual per-capita income of USD 129.726 in 2016). In that respect, Qatar strongly divers with other countries in the region which are more oil dependent, and therefore has stronger ties with Saudi Arabia. Qatar’s natural link with Iran, and its recent large investments in the Russian energy sector are a thorn in the eye of the Saudi Arabian leaders. The new conflict does not seem to affect Qatar’s LNG exports, except perhaps for some exports towards the UAE. But the majority of the LNG exports can still leave the country via shipments through Iranian waters. Therefore, also the impact on international LNG prices seems to be limited for the moment.

Obviously, things would change if the dispute escalates into an armed conflict which could threaten both oil and gas production in Qatar, and perhaps disturb production at surrounding oil and gas fields. In this event, the risk premium would increase significantly as soon as speculators start to price in possible production and/or export disruptions. All in all, this is still a risk scenario, but with a low probability.

OPEC delivered, but markets unexpectedly hoped for more

The coalition between OPEC and non-OPEC oil producers decided to extend its production cut agreement of 1.8 million barrels per day in total by another 9 months (until Q1 2018) after looking into several scenario’s, including 6-, 9-, and 12-month agreements and possible extra production cuts. Nigeria and Libya will remain exempt from making cuts, and Iran retains the same output target. With this agreement, the coalition has gained time and stability for the next nine months. No strategy is set yet for after Q1 2018. More details will probably follow at the meeting on 30 November.

During the coming nine months, the oil producers expect the near record high inventory levels to drop towards the five-year averages, and to result in a rebalancing of the market where supply meets demand. By ending the global oil glut during the coming months, the alliance expects to have created a floor under oil prices of approximately USD 50/bbl. During and after the meeting, oil prices fell under severe pressure as investors were disappointed that OPEC had not done more. We believe that OPEC tries to rebalance the market with a 6-9 month outlook, while investors only look at the impact on oil prices in the next few months. Investors remain cautious on the short-term impact of OPEC’s long-term policy and as a result they cut further their speculative long-positions. We saw that investors had entered speculative long-positions ahead of the meeting in the event OPEC surprised with a larger-than-expected-production-cut. Since this did not happen, these positions were closed again, adding pressure to oil prices. We expect this  to have a temporary effect though. According to the Saudi oil minister Khalid Al-Falih, higher US oil production in 2017 will not be enough to derail this strategy.

Our Brent and WTI forecasts for end-Q2 are both USD 50/bbl. This is in line with the current market conditions. For the 2017 year-end, we expect both Brent and WTI oil prices to rally towards USD 60/bbl. We don’t see a reason at this moment to lower this forecast based on the comments at the OPEC press conference for the following reasons:

  • US crude stocks already started to decline,
  • We do not expect US crude production to continue its recovery into 2018 in the same pace as seen in recent months,
  • Global demand remains strong (+1.3 mb/d growth per year), helped by the start of the US driving season, and
  • Investments in the oil sector (non-OPEC, non-US shale) remain under pressure. This will affect supply growth negatively.