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Qatar's enforced isolation and its effect on oil prices
Source: easyMarkets , Author: James Trescothick
Posted: Mon June 12, 2017 11:43 am

INTERNATIONAL. It did not come as a shock but on Monday 5th June, Saudi Arabia, Egypt, Bahrain and the United Arab Emirates (UAE) cut all diplomatic relations with Qatar.
The reason behind this drastic move is the accusation that the nation is an active supporter of terrorism within the region and of Iran.
All Qataris who reside in the Kingdom of Saudi Arabia (KSA), Bahrain and UAE have been given two weeks to leave. Qatari diplomats were only given 48 hours to leave both Egypt and the UAE.  The borders with the small Gulf state have all been closed, causing great concern for Qatar’s food imports (Doha relies on Saudi Arabia for 40% of its food imports) and Egypt has closed its airspace to Qatari planes with others expected to follow, causing massive travel disruption for Qatar Airways.
The country’s state-owned flag carrier faces the prospect of being boxed-in, due to the fact that the airspace ban surrounds the country. Saudi Arabia, Bahrain and UAE have all banned flights, which leads Qatar to face an increase of costs and flight time - the average journey time to Europe has increased from 6 hours to 9 hours.
Qatar’s construction projects are also likely to be affected. The 2022 World Cup, to be held in Qatar, is fast approaching and all key materials needed to finalise preparation were being supplied by Saudi Arabia. The closure of the borders will push up prices and cause huge delays. 
Qatar is an active member of OPEC since 1961. How will this crisis affect oil prices? 

Firstly, there is the potential that the OPEC agreement to limit current oil production could collapse. If that happens oil prices could potentially fall. However, Qatar is one of the smallest oil producers in OPEC, with estimated proven reserves of 25 billion barrels which is dwarfed by Saudi Arabia’s 266 billion barrels. 

For Qatar to really have an impact on the current agreement, it would have to be backed by other smaller members like Algeria and Nigeria.  And even if Qatar was to increase production, they still face the impossible mission of getting production out with the border restrictions currently in place.
The main danger to the region and indeed to oil prices is that increased tension could lead Qatar to reach out even further to Iran for support which would no doubt sour diplomatic relations even more so. This is likely because Saudi Arabia is backed by the USA with President Trump saying in a recent visit to the Kingdom that Iran was to blame for the instability in the region.
However, the most likely outcome is that the small country of Qatar with its 2.7 million population, will negotiate and could be encouraged for a leadership change in Doha. This could appease its former Arab partners.
Either way, the region and its ongoing tensions and thus impact on oil prices will always be there.
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Author: James Trescothick is Senior Global Strategist, easyMarkets  

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Disclaimer: The views and opinions expressed in this article are those of the author. BI-ME has not made any editorial review of this piece, therefore the views and opinions do not necessarily reflect those of BI-ME.



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