Qatar: Markets do not (as yet) price in a possible escalation - Natixis

The announcement of recent diplomatic measures on Qatar by a coalition of Arab countries led by Saudi Arabia appears to be having a limited impact on the markets: although the Qatar Stock Exchange has lost 9.6% since Monday, its sharpest bear run since 2009, the region’s other equity markets did not undergo significant corrections, according to Lysu Paez Cortez, Research Analyst at Natixis.

Key Quotes

“While the Qatar 5-year CDS have climbed by 20 points since Monday, those of neighbouring countries have risen by just a few points.”

“As regards commodities, prices for oil and natural gas - bearing in mind Qatar is a major producer, the biggest liquefied natural gas exporter in the world (accounting for 30% of global supply) and a member of OPEC - tended to be downbeat.

Measures announced by the Arab coalition concerning transport are not a threat to Qatar’s capacity to export oil and gas, as the Dolphin gas pipeline linking Qatar and the United Arab Emirates and Oman (which has a capacity of 3.2bcf/d) is currently operating normally. In April, Qatar produced 618 thousand crude bpd and exported 500 thousand bpd. Given current conditions, with very abundant stocks of oil and natural gas at world level, the market does not appear concerned at prospects the supply of Qatari oil and gas could be cut off.”

“The risk of an escalation in the region cannot be ruled out...

The measures announced by Saudi Arabia were reportedly triggered by news that Qatar paid a $1bn ransom to various terrorist groups in the region (affiliated to Al Qaeda) in return for the release of members of the royal family kidnapped in Iraq at the end of 2015, allegations that have been denied by Qatar. Qatar has attracted much criticism in recent years because of its support for the Muslim Brotherhood in Egypt as well as Islamist movements in Libya and Syria. Also, Qatar’s rapprochement with Iran may have acted as a trigger and the blockade instituted by the coalition could be aimed at forcing a shift in Qatari policy, possibly a regime change, in order to strengthen Saudi Arabia’s hegemony over the region.” 

“The response of the small Gulf monarchy has been subdued, the authorities in Doha declaring that the blockage was based on “unfounded allegations”. The decision of Qatar’s neighbours appears aimed at restoring the political configuration that long prevailed in the region, namely pitting Saudi Arabia against Iran. Efforts to broker a deal are very much in evidence, with Kuwait’s emir having proposed to act as mediator to resolve what is the most serious political crisis experienced by the Gulf monarchies. However, if this diplomatic crisis goes from bad to worse, market volatility is likely to pick up, as it will not be long before this has an unsettling effect on the crude oil market as well as the global LNG market. Qatar is heavily reliant on Saudi imports of food, its only land border, a situation that may destabilize the domestic situation if the ban turns to be a long lasting condition.”  

“It is no coincidence that Saudi Arabia’s decision comes in the wake of Donald Trump’s visit to the region, all the coalition members being staunch allies of the US. It will be recalled that during his visit to Saudi Arabia last month, Donald Trump lashed out at Iran, saying it was an enemy, that it supported terrorism and that it was destabilising the region. This was completely at odds with the stance of the US under the Obama administration, which wanted a rapprochement with the Persian power. Trump has backed up Qatar’s isolation, despite the fact that it hosts the largest US military command platform in the region.”