Qatar's rift with Saudi Arabia could turn up the heat on oil, gas prices

Gas traders are on high alert as row between Qatar and neighboring Middle East countries escalates

Any political tension between major Middle Eastern energy-producing nations usually leads to a spike in global oil prices. But as the spat between Qatar and neighboring countries escalates, traders in the world’s gas markets will be on high alert too.

On Monday, Saudi Arabia, Bahrain, United Arab Emirates and Egypt broke diplomatic ties with Qatar, accusing the country of backing terrorism activities. Qatar has denied the allegations. The diplomatic row led U.S. oil traded on the New York Mercantile Exchange up by as much as 1.6% to $48.42 per barrel in Asian trading, before it slipped back later.

The relatively calm oil market response so far reflects the fact that Qatar, a member of the Organization of the Petroleum Exporting Countries, isn’t actually a major petroleum producer. It accounts for around 2% of the cartel’s output, shifting 618,000 barrels a day in April.

By contrast the small nation, which lies on the eastern side of the Arabian peninsula, is a vital player in gas markets, as the world’s largest exporter of liquefied natural gas. In 2016 it shipped out around 77.2 million tons of the super-chilled gas, equivalent to about one-third of global supply, according to International Gas Union. Most of Qatar’s gas is located in its massive offshore North Field: Only Russia and Iran have more proven gas reserves, according to BP ’s Statistical Review of World Energy.

To date, there is no indication that Qatar’s gas exports, which are mostly loaded up on ships before heading off around the globe, will be impacted by its row with neighboring Saudi Arabia.

Major customers for Qatar’s gas are based in Asia—Japan sources around 15% of its gas from Qatar, while China and India are also big customers. Middle Eastern buyers account for less than 5% of Qatar’s total exports.

Japan’s Jera Co., the world’s top LNG importer, said it has received assurances from Qatargas that shipments will continue as scheduled. “We see no impact on LNG supply, but will continue to monitor geopolitical risks going forward,” said Jera spokesman Atsuo Sawaki. Qatargas is now contracted to deliver about 8 million tons of LNG to Jera a year.

Prices for LNG are often set according to long-term contracts between suppliers and consumers, and are often based on a formula linked to oil prices. However, in recent years a growing spot market has developed as global gas supplies, from the U.S. to Australia, have increased.

For now, analysts say the latest diplomatic fracas won’t yield any immediate impact on the appetite of big consumers. But if tensions worsen, oil prices could rise, which in turn could impact gas prices.

“As most of Asia’s [gas] long-term contracts are still oil indexed, this may increase contracted LNG prices and thus spot prices,” said Kelvin Li, a gas expert at consultancy Lantau Group.

Even though Qatar isn’t a leading oil producer, there is concern that its widening political rift with Saudi Arabia could prompt it to back out of OPEC’s current plans to cut crude output. Late last year, OPEC agreed to cut its oil production by 1.2 million barrels a day to reduce a supply glut. It agreed to extend those production cuts to March next year at its latest meeting last month.

The fallout with Saudi Arabia and other nations could leave Qatar with “little reason to keep the production quota,” said Phin Ziebell, a Melbourne-based economist at National Australia Bank .

A further worry is that if Qatar drops out of the supply cut deal, other producers, who are already anxious about losing market share, may follow suit, analysts say.

Mayumi Negishi in Tokyo contributed to this article

 Source: The Wall Street Journal