Developments in the Oil Industry & Qatar’s Exit From OPEC

The Oil and Natural Gas industry has been experiencing a variety of significant developments throughout last week. Initially, markets were thrown into turbulence when the price of Brent crude oil fell by 30% following the four year high in October. This was followed by Qatar’s shock decision to exit OPEC (Organisation of the Petroleum Exporting Countries) after 57 years of membership. Political and economic changes in such a widely utilised commodity as oil have varying ramifications for parties across the globe, both positive and negative.

Wallstreet, European stocks and bond markets have all taken a hit due to the decline in oil prices. Investors are already actively adjusting their portfolios to grapple with the uncertainty created by US-China trade tensions. The major question is whether the drop in oil price reflects an oversupply or growing fears of an impending economic slowdown.

Currently, Brent Crude is floating around the USD 60.00 to 65.00 mark, making energy stocks the worst performer on Wallstreet. The energy sector of the S&P 500 has dropped by 15% since October, and the Euro Stoxx Oil and Gas Index dropped by 12% in the same period. The energy sector of the S&P only makes up 5.5% of the index, meaning the overall economic impact is limited in scope.

However, if Brent were to decrease further to around USD 45.00, “that becomes a much clearer signal that it is not just an oversupply challenge, but really is slowing global growth”, according to Michael Arone, chief investment strategist at State Street Global Advisors. “Then it becomes more problematic for a broader swath of the market”.

A potential economic slowdown has been discussed extensively in previous articles. An oversupply problem is a much easier driver of prices to fix. OPEC is an intergovernmental organisation of 15 (now 14) member countries from across the world. On Thursday, the member states will meet at their headquarters in Vienna to come to a consensus on potential output/supply cuts. Although not being a member, Russia has strongly signalled that it would cooperate with the organisation.

The organisation has most recently fallen victim to disputes among member states. Qatar has become the first country to abandon the producer group, fracturing the trade bloc of the Gulf States. Qatar claims that their exit is apolitically motivated with Sheik Hamad bin Jassim Al Thani tweeting “this organisation has become useless and adds nothing to us, it is only being used for purposes aimed at harming our national interest”.

Most experts, however, agree that the cause for the departure was due to disputes between Qatar and OPEC’s most powerful member, Saudi Arabia. Ashley Kelty, oil and gas research analyst at Cantor Fitzgerald Europe commented as follows: “The longstanding Saudi-led economic and political boycott of Qatar is bound to have played a part in the decision. The exit of Qatar is suggestive of growing dissatisfaction among OPEC nations with the Saudis’ leadership”.

Although the move by Qatar signals rising political tensions in the region, the overall economic impact of their exit from OPEC is minimal compared to the influence held by other members. Qatar only produces around 600,000 barrels of crude per day. Compare this figure with Saudi Arabia at 10,460,710 and Russia at 11,200,000. Qatar intends to move into the Liquefied Natural Gas (LNG) markets, increasing their exports from 77 to 110 million tones per year.

Always eager to share his opinion, President Trump tweeted “Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! Thank you to Saudi Arabia, but let’s go lower!”. His administration has been extremely vocal about pressuring OPEC into low oil prices. 

Low oil prices are a benefit and a cost simultaneously depending on the party in question. Winners include car dealerships, car drivers, airlines and airline travellers. Losers include the varying companies included in the extraction, refining and exporting of oil, as well as any adjacent industries.

The president's favouring of low prices are more likely driven by the political landscape than a pursuit for economic benefits. Voters across the country are consumers of oil in a multitude of ways, whilst producers are concentrated in a handful of petroleum states and hold less power over the continuation of the current administration. 

APPENDIX

https://www.ft.com/content/66cc3bee-f6c6-11e8-af46-2022a0b02a6c

https://www.ft.com/content/4c10229c-f48d-11e8-9623-d7f9881e729f

https://www.ft.com/stream/fc701b0c-fd64-4383-b446-7bfe1b82c899