Several Arab countries including Saudi Arabia, Egypt, the United Arab Emirates and Bahrain have cut diplomatic ties to Qatar, accusing it of supporting terrorism. As Qatar is one of the OPEC member countries, this unprecedented move has instantly drawn world attention to the oil-producing region, sending shockwaves through the oil markets.
Analysts generally attributed the price increase to concerns over supply disruptions in the region, but it should be pointed out that despite the market reaction, the actual impact of the Middle East rift on the global oil supply situation will be limited.
First of all, the latest development in the Middle East is actually a diplomatic incident, which is unlikely to lead to any military action under normal circumstances, indicating no disruption to the regional oil production and supply.
Moreover, oil is in abundant supply currently. While OPEC agreed to stabilize oil prices by cutting production by 1.2 million barrels a day late last year, non-OPEC countries like the US have quickly increased their production to compete for market share, leading to global oil prices fluctuating around the $50 per barrel level.
Some may be concerned that Qatar will not stick to its production quota after the diplomatic tension, further weakening the effect of the OPEC production cut deal and weighing down prices. But it should be noted that while Qatar is the top exporter of liquefied natural gas in the world, it is the second-smallest oil producer among OPEC members. With Saudi Arabia remaining the de facto leader and the largest producer in OPEC, any change in Qatar's production, whether a reduction or increase, will only have a limited impact on the fundamentals of supply and demand. As such, although the supply may be slightly affected, global oil prices will only see a modest impact from the diplomatic issue once markets digest the news.
This article was written by Wang Jiamei and first appeared in the Global Times.