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Oil prices slump as Gulf states cut ties with neighbour and US output increases
Thursday 15 Jun 2017 Author: Tom Sieber

Oil prices have remained constrained this year thanks to an ongoing surplus of supply driven by output from US shale producers. That’s despite the efforts of oil producers’ cartel OPEC in concert with other major oil producing nations in trying to put a cap on output.

There is a now a twist to the story which could cause swings in the oil price – both down and up.

Trouble in the Gulf as US ramps up

A diplomatic crisis in the Gulf could threaten oil quota agreements, according to traders.

Saudi Arabia, Bahrain, the United Arab Emirates, Egypt and Yemen have all cut ties with Qatar and enforced land and air blockades, ostensibly due to its support for its extremism but perhaps more likely because of its ties to Iran.

Of the six members of the Gulf Co-operation Council (of which Qatar is ironically one), Kuwait and Oman remain on the side lines for now – with Kuwait actively trying to broker a deal.

Some traders are worried that the Qatari crisis means OPEC won’t stick to agreed oil production rates, which is potentially bad for the oil price.

At the same time, US crude stockpiles rose for the first time in nine weeks in the week ending 2 June, indicating that demand is not strong enough to balance with supply.

However, if the crisis escalates then oil prices could spike as focus shifts from the status of the OPEC production cuts, which were extended at a meeting in Vienna in late May, to any impact on production from a ramping of geopolitical tensions in the world’s major oil producing region.

This represents a difficult tightrope for investors. In a previous look at BP (BP.) and Royal Dutch Shell (RDSB) and their ability to sustain dividend payments, we highlighted $50 per barrel as the key threshold below which it becomes more difficult for both companies to balance the books.

Talking point circle

What is the outlook for prices?

At the time of writing the European oil benchmark Brent was around the $48 per barrel while its US counterpart West Texas Intermediate (WTI) was trading between $45 and $46 per barrel.

UBS analyst Jon Rigby comments: ‘We have cut our price forecasts by $4 to $5 per barrel for 2017 to 2019. But if markets play out as we expect, inventories should reduce towards normal levels by the first quarter of 2018, implying to us oil prices of around $60 per barrel by year end.

‘We think 2018 will likely stay at around those levels as US production surges and before reduced new conventional supply starts to be evident.’ (TS)

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