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Could the Qatar crisis spike oil prices?

The market wants to shrug off the Riyadh-Doha spat. It’s a risky position

An oil market that loses 4% on a day when Islamic State (IS) attacks Iran's parliament, Tehran blames Riyadh, and Donald Trump tweets his support as Saudi Arabia tries to humiliate another Gulf state is entering unusual territory. Bears still believe tight oil growth, modest US consumption and the frailty of the Opec deal can overwhelm the rising geopolitical risks in the Middle East. It raises the chance of a price shock.

The Saudi vs Qatar scrap may end quickly, with the countries' rulers dancing to a more peaceful drumbeat again. But the signs are not good. Riyadh and the other Gulf Cooperation Council (GCC) states on its side are demanding Doha's capitulation. Qatar's willingness to deal with Iran, with which it shares a maritime border (and the world's biggest gasfield), is the main reason. The rationale that Doha has funded terror around the region might be truebut others often say the same about Saudi Arabia.

All paths out of the crisis involve Qatar's submission. Emir Tamim may be forced out-a Saudi coup. Doha may expel Muslim Brotherhood members and publicly repudiate its support of other Islamist groups around the region-a defeat of its foreign policy. Al Jazeera might be shut downa huge embarrassment. Qatar might fall into line over Iran. The 2022 World Cup may be held in a Saudi vassal state.

The GCC brand, in recent years already a cover for Saudi political power, has been damaged, possibly terminally. The Opec deal, which within a week of the 27 May Vienna meeting already looked a dud, is surely under threatnot because Qatar, which was always sceptical of the cuts, has the volume to wreck it but because the Saudi move on Doha signals even deeper sectarian tensions. Riyadh's supply deal needs cooperation from its geopolitical foes Iran and Iraq, which itch to increase production again sooner than later.

A risk to the supply deal would ordinarily be bearish: it implies a return to maximum production. But that's not true if it falls apart because of Sunni-Shia conflict in the Gulf. It's not something to be sanguine about. Iran has fingered Saudi Arabia for the IS terror attack on the majlis. Riyadh is already fighting one desperate war against another neighbour, in Yemen, and was willing in 2011 to send tanks across the causeway into Bahrain to quell a Shia uprising. Deputy crown prince Mohammed bin Salman has said the kingdom "won't wait for the battle to be in Saudi Arabia".

Market intervention

Suddenly, Trump adviser Steve Bannon's predictions of a major war in the Middle East involving Iran don't look so far-fetched. Trump's fawning visit to Riyadhas well as his claim of credit for the escalation with Qatar and the White House's bizarre statement blaming Iran for the terror attack against itselfshows the US will back Saudi regional adventurism. Some renewed sanctions on Iran can't be off the radar.

The oil bears ignore all this because of US oil. The surprise commercial stock build across both products and crude oil announced on 7 June makes some think the glut isn't budging. Rising counts in the US, up by eight for the week ending 2 June, should bring yet more supply. Gasoline demand is down a bit compared with the same period last year.

Aside from the risk of war between members, Opec's deal is also looking fragile. It hasn't yielded a price dividend and the lingering stock overhand is testing the main players' faith. Rosneft's boss Igor Sechin has already warned Opec that Russia stands ready to start pumping more again. He told the FT that the Opec deal could end "abruptly", adding: "If something goes wrong, we will not let them occupy our markets." Platts reckons compliance nosedived in May. Libya and Nigeria are pumping more low-sulphur crude into the Atlantic.

How to trade these conflicting bearish and bullish risks? Oil-price troughs of the past usually ended unexpectedly, when geopolitics trumped the fundamentals. None of the Kuwait City expats expected Iraqi tanks to roll into town in 1990. None of the ones last week feasting on Doha hotel food brought in from Saudi Arabia thought that supply chain could shut down overnight. If the sectarian tensions in the Gulf-source of about a third of the world's seaborne oil-at last boil over, the Permian and its rigs will feel a long way away.

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