Will Qatar Rift Lead to Fall in Crude Oil Prices?

Tue, 6 Jun Pre-Open

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A major development we saw yesterday was Saudi Arabia, Egypt, the United Arab Emirates and Bahrain cutting their ties with Qatar. The nations accused Qatar of meddling in their internal affairs and backing terrorism.

What was the impact of the above development on financial markets?

Well, Qatar's main stock index took a dip and fell more than 7%. Losses were also seen for Dubai and the main Saudi Index.

But more than stock markets, there are lingering concerns on how the above developments will affect crude oil prices.

While crude oil prices rose yesterday after the announcement, there remain many doubts how they will pare in coming months.

Many are of the view that the above tensions will lead to supply disruptions and therefore affect crude oil prices.

All eyes are now set to see if Qatar, a member of the Organization of the Petroleum Exporting Countries (OPEC), decides to disrupt the production cutback deal.

One shall note that at a meeting last week in Vienna, OPEC and some non-OPEC producers agreed to extend supply cuts of 1.8 million barrels per day until the end of the first quarter of 2018.

If Qatar opts out of this deal, it would lead to a fall in crude oil prices. More so, it can also compel other producers to get off the deal. If this happens to be the case, there will be a rise in crude oil supplies which will weigh on crude oil prices.

Note that crude oil prices have been remarkably silent over the last two years. Prices have remained within a tight range, rarely dropping below US$40 or rising above US$60.

In other words, volatility has crashed. And if you are trading crude oil, it's critical to understand why this has occurred. A recent issue of Vivek Kaul's Inner Circle (requires subscription) explains what triggered this taming of crude oil prices.

Nonetheless, a fall in crude oil prices means good news for the Indian economy. This we say because of India's huge dependence on crude imports. As per Business Standard, during the financial year 2016-17, India's total gross petroleum imports inclusive of crude and petroleum, oil and lubricants (POL) segment stood at US$80.8 billion.

So, a fall in crude oil prices bodes well for the Indian economy as it will lead to fall in import bills, aid the current account deficit, and would mean an appreciation for the Indian rupee. It will also mean that inflation in India would seize to be highly vulnerable to international crude oil prices.

Only time will tell how this all pan out. Meanwhile, we'll keep you posted on the latest developments.

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