As if brimming U.S. supplies were not enough, oil prices got another blow from the OPEC after the cartel’s top brass Saudi Arabia and other Arab states cut their diplomatic ties with Qatar, which was accused of nursing terrorism. The move caused the worst tiff in years among some powerful Arab countries and oil slipped again.
Saudi Arabia alleged Qatar for supporting militant groups — some backed by regional opponent Iran — and broadcasting their views and beliefs. Iran — which has long been at loggerheads with Saudi Arabia and a lesser known target of the move — held President Donald Trump responsible for creating this situation in his recent Saudi trip.
As per Reuters, Saudi Arabia, the United Arab Emirates, Egypt and Bahrain stopped transport links with top liquefied natural gas (LNG) and condensate shipper Qatar. Also, Qatar was barred from the Saudi-led combination fighting in Yemen, as per CNBC. The news at first benefited Brent crude prices as much as by 1.6%, but gradually the market digested another impact of the dispute.
Investors should note that oil prices slipped to the pre-OPEC output cut level in early May on worries over U.S. supply glut. But probably to bring back confidence in the oil market, the Saudi Arabia and Russia led OPEC and non-OPEC oil producers – announced an extension of output cuts to the first quarter of 2018. In fact, the two big producers declared the cuts way before the aggregate decision was announced at the OPEC meeting on May 25.
Now, investors have started fearing that the OPEC argument may cause instability in the output cut deal. Reuters hinted that oil prices fell nearly 1% on Monday due to this concern. Overall, U.S. crude oil ETF United States Oil (USO - Free Report) and Brent crude ETF United States Brent Oil (BNO - Free Report) have lost around 4.8% and 4.5% in the last five trading sessions (as of June 5, 2017). On June 5, 2017, USO and BNO lost over 0.6% and 1.1% respectively, as a result of the row (read: Top ETF Stories of May).
Is the Rift That Harmful to OPEC Deal?
Reuters went on to explain that Qatar's crude output ranks one of the lowest among the OPEC countries. So, from this perspective, this incident should not threaten the ongoing output curb agreement. However, market participants are scared of the fact that “tension within the cartel could weaken the supply deal aimed at supporting prices (read: Oil at Pre-OPEC Level: ETFs to Benefit).”
As per an article published on MarketWatch, one analyst said that “increased tensions in the Middle East props up oil prices with a fear bid, but the dynamic of this Qatar issue is different because it is largely between Saudi Arabia and Iran.” Also, the analyst went on to elaborate that chances of military action between Saudi and the accused are feeble, indicating very low probability of output outages.
Overall, U.S. supplies are likely to regulate of the oil price movement. Geopolitical risks are less likely to push up oil prices and any significant step-back in OPEC output cut is also not called for.
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