Energy markets remain stable — for now
Washington - Oil and natural gas markets have been taking the rift between Qatar and its neighbours in their stride, although there have been regional price fluctuations.
International crude and natural gas prices, for the most part, are being influenced by other market factors, after concerns about disruptions to Qatar’s liquefied natural gas (LNG) and crude exports eased. That could change, however, if the crisis lasts for months or if one of the players involved forces an escalation in tensions.
What is helping keep energy prices in line is the surfeit of crude and LNG available due to weak global demand and the fact that Qatar’s LNG and crude exports to its largest client base — Asia — face no shipping obstacles. Tankers heading towards Asia from Qatar travel through Qatari and Omani waters and Muscat is not participating in the blockade against Doha.
However, gas traders have been monitoring abrupt changes in shipping routes for tankers carrying Qatari LNG scheduled to pass through the Suez Canal and watching to see whether Egypt would block non- Qatari-flagged vessels carrying Qatari LNG from discharging their cargoes.
Egypt, which along with Saudi Arabia, the United Arab Emirates and others, severed political, trade and transportation ties with Doha, is in an awkward position of being dependent upon Qatari LNG supplies to meet domestic power consumption while also able to affect the flow of Qatari gas and crude exports to the west.
European gas traders were alarmed when two tankers carrying Qatari LNG that were destined for the United Kingdom suddenly shifted course on June 8, diverting from the Red Sea and the Suez Canal to follow a longer course around Africa over concern about whether Egypt would deny tankers carrying Qatari LNG or crude passage through the Suez Canal, even though the Suez Canal Authority had stated that passage of Qatari ships would not be affected by the diplomatic rift. Under the 1888 treaty governing transit of the Suez Canal, Egypt can only use an exemption to the treaty if it is in a state of war.
Even if Cairo does not block tankers carrying Qatari LNG through the Suez Canal, it can hit Doha financially by reducing the canal-fee discount it usually offers LNG tankers, making it more expensive and potentially uncompetitive for Qatar to ship its European-bound LNG cargoes through the canal. This may explain why those tankers carrying Qatari LNG to the United Kingdom changed course.
Gas traders watched closely until two vessels controlled by Swiss-based trading house Trafigura carrying Qatari LNG discharged their cargoes in Egypt several days after the maritime blockade against Doha went into effect, indicating that Cairo was willing to accept Qatari LNG supplies delivered by tankers that are not owned and operated by the Gulf country.
As a member of OPEC, Qatar is participating in a deal between cartel members and independent producers to collectively restrain output by 1.8 million barrels per day (bpd) through March 2018. Doha could decide to withdraw from the deal but the effects of such a move on the oil market would be insignificant, given its 30,000 bpd pledged cut.
International oil prices remain at less than $50 a barrel thanks to ample global crude stocks and recently increased production from OPEC as well as participating and non-participating independent producers.
There would be more serious implications for natural gas markets if Doha decided to retaliate against the United Arab Emirates — one of the key instigators of the embargoes levelled against it — by stopping supply through the Dolphin pipeline of some 1.8 billion cubic feet per day of Qatari natural gas. The UAE is dependent on those supplies to feed power and water utilities and would be forced to scramble to find alternative gas supplies as peak power demand hits during the summer months.
Another potential target for Doha could be Egypt, which has relied heavily on Qatari LNG imports over the last several years to fill the gap left by a shortfall in domestic gas production. However, Egyptian purchases of Qatari LNG are not contracted directly with Doha but rather through spot purchases provided largely by Swiss commodity trading houses.
Qatar could block exports to specific countries by issuing destination restrictions but that would be an extreme move and would put into question Doha’s reliability as a top LNG supplier.
The dispute involving Qatar could have serious economic implications for Doha’s long-term LNG sales contracts to key Asian customers. Japanese utilities locked into contracts that expire in 2021 may demand more flexible terms from Qatar and may cut the number of contracts they renew with Doha, allowing them to turn to more spot market purchases and diversify suppliers.