Qatar's Exit From OPEC: Not A Bear's Dream Come True

Summary

• At first glance, concerns over Qatar now leaving OPEC after more than 57 years of membership may signal bearish prospects ahead.
• However, given the country's reason(s) for leaving, it's unlikely any bearish scenario will hit markets.
• If anything, this will be either neutral for crude prices, or there's a small chance that it could be bullish.
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Anybody who has been watching the oil markets in recent months can attest to the fact that investors have had to deal with a tremendous amount of volatility, driven by a mix of fears centered around soaring US output, weaker global demand growth, and whether or not OPEC and some of its non-OPEC allies like Russia will intervene again to result an early glut and push prices higher. Now, just as prices have begun to climb higher again, thanks in part to the likely outcome of OPEC actually cutting production, but also due in large part to trade tensions between the US and China easing, another shocking development has stirred up the pool: come January 1st of next year, Qatar will be leaving OPEC and will, instead, operate autonomously in the oil markets. This development may rattle investors at first, but if anything, it’s more likely to be either a neutral or, possibly bullish even, outcome for investors in this space.

A look at developments

According to an article published on CNBC, Saad al-Kaabi, Qatar’s Energy Minister, announced that as of January 1st, the nation will no longer be an active member of OPEC. This is the first time the nation will have left the group since it joined 57 years ago. To energy bears, this might come across as a further sign of the group fracturing. This is notable because in any scenario, besides one involving significant armed conflict, where OPEC falls apart would almost certainly be a net negative for oil prices since that group of nations left directionless would probably compete openly and aggressively on price at a time when their own output is cheaper than US shale.

Fortunately, though, the chance of this leading to a further decline in OPEC’s structure is slim to say the least. This is due to the fact that the reasons for Qatar wanting to leave the group are special compared to what other nations might be facing. First and foremost, while al-Kaabi stated that their decision to withdraw was “technical and strategic” and not politically-motivated, there’s no secret that there’s a lot of hostility between Qatar and OPEC’s de facto leader Saudi Arabia. Last June, for instance, citing a support for Iran and terrorist groups like the Muslim Brotherhood, Saudi Arabia decided to cut all diplomatic and trade ties with Qatar. It wasn’t alone.

The UAE (United Arab Emirates), OPEC’s fourth-largest oil producer with 3.16 million barrels per day of output, followed in Saudi Arabia’s tracks, as did Bahrain, Egypt, Yemen, the Maldives, and other nations within the region. A list of 13 demands was issued by Saudi Arabia, which stated that in order to stop the region’s boycott, Qatar would need to cut ties with the Muslim Brotherhood, shut down state-funded news network Al Jazeera, and more.

The Persian Gulf crisis has continued on since that fateful day last June and, as of the time of this writing, there has been little evidence that anything substantive might change. One glimmer of hope came through an article recently published by Al Jazeera, in which the news organization said that Saudi Arabia’s King, Bin Salman, has invited Qatar’s Monarch, through the Gulf Cooperation Council’s Secretary General, to Saudi Arabia to discuss ways to resolve the conflict.

It’s hard to believe, given all of these developments, that there’s not a political component behind this, but it would also be foolish to say that al-Kaabi’s statement about technical and strategic changes is entirely wrong too. After all, unlike the rest of OPEC, which focuses most of its efforts around oil production, Qatar has become known in the region and across the world as a powerhouse in the LNG space. In an article that I wrote last year where I discussed the initial severing of ties between Qatar and its neighbors, I stated the fact that the nation was responsible for producing around 78.8 million metric tonnes of LNG per year (as of year-end 2016). This accounted for, at the time, about 30.6% of global production, and an impressive 83% of that was exported from the country to various parts of the world.

While Qatar isn’t as open about its LNG operations as it is about its oil business, recent data suggests that the nation’s LNG capacity has only continued to grow. Today, that figure stands at around 110 million metric tonnes per year, or an estimated 6.2 million boe (barrels of oil equivalent) per day. As of March of this year, one estimate suggested that global capacity for LNG stands at around 851 million metric tonnes, meaning that Qatar is responsible for somewhere around 13% of global output today. To put this in perspective, this is a larger market share than what Saudi Arabia has of oil.

This should be either neutral or bullish

What we can conclude here is that Qatar’s decision to separate from OPEC is likely a mix of political considerations and a desire to place a greater emphasis on LNG than on oil in the future. Unless we were to see signs of a major party leaving OPEC, like Iraq or Iran, I don’t see a bearish outlook here. Even in terms of controlling energy markets and the prospect of a production cut, I don’t see any sort of negative impact. This is because, in October of this year, Qatar produced just 609 thousand barrels per day of oil. This accounted for only 1.9% of OPEC’s total production of 32.9 million barrels per day for the month, and even if there’s a debate over who will cut and who won’t, Qatar is unlikely to be relevant in that discussion because the nation’s output in October was actually 9 thousand barrels per day lower than what it agreed to shrink production to as part of OPEC’s 2016 production cuts.

In short, investors would be unwise to perceive this move by Qatar as some sort of evidence that OPEC will collapse, and they would also be unwise to think that this might have any sort of impact on the group’s ability and willingness to slash output. More likely than not, the end result here will be nothing more than a neutral impact on the global oil market. There is, of course, one scenario where this could turn bullish for investors, but even that is improbable. That would be in the event that a flare-up in tensions would lead to actual armed combat, but to invest based on that without any major indications it might come to pass would be too speculative for my blood.

Takeaway

At a time when oil prices have performed poorly and every little thing seems to spook the market, it’s understandable why some investors might see Qatar’s decision to leave OPEC as a negative for global oil markets, but I believe the picture, on the whole, is less significant than most might think. The country produces very little oil, its decision to leave could be driven by discontent over current relations with its neighbors (including two fellow OPEC nations), and the country wishes to focus more on LNG than oil so a different strategic angle might be warranted anyways. As for an oil production cut from OPEC, I see a scenario playing out where the group will almost certainly curtail output, irrespective of what happens with Qatar.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.