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Energy Prices Weakened Further as Gulf Countries Cut Ties with Qatar Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Jun 06 17 05:09 ET

Contrary to traditional wisdom, energy prices weakened in light of heightened geopolitical tensions in the Middle. Extending the selloff for a third consecutive day, the front-month WTI crude oil contract has dropped -0.44% ahead of US opening. Meanwhile, the Brent contract has slipped -0.2%. Usually energy prices rally amidst concerns over output disruption whenever there's political conflict in oil producing countries. However, the latest incident of boycott of Qatar by other Arab Gulf countries has raised speculations that the output deal might be dissolved amidst the tensions. Precious metals remained the biggest beneficiary over geopolitical tensions, in addition to USD weakness. The benchmark Comex gold contract has soared to the highest level in almost two months. It has gained over +6% from May's low of 1214. The Comex silver contract has risen to the highest level in more than a month and has gained almost +10% from May's low.

Arab Gulf countries, including Saudi Arabia, Bahrain, the UAE and Egypt, decided to cut diplomatic ties with Qatar and suspended Doha-bound flights, accusing Qatar of supporting terrorism and destabilizing the region. A statement issued by the Saudi government accused Qatar of collaborating with "Iranian-backed terrorist groups" in the eastern region of Qatif and in Bahrain, while Qatar called the accusation "unjustified" and with "no basis in fact". Concerning the latest developments, Qatar is ejected from the Saudi-led coalition in Yemen, which, together with Maldives, also cut ties with Qatar. Currently, Kuwait and Oman are the only Gulf Cooperation Council members maintaining relations with Qatar. Moreover, Qataris are given 14 days to leave the UAE, Bahrain and Saudi Arabia, while Emirates airline announced it had suspended all flights to and from Doha starting today.

The market is concerned that the diplomatic crisis would deepen and even affect the OPEC/non-OPEC oil output cut deal. Notwithstanding its limited oil production, Qatar is an OPEC member and has agreed to reduce oil output to 0.62M bpd from 0.65M bpd as of October 2016. To put the numbers into context, Saudi Arabia, the world's largest oil producers, agreed to cut its output to 10.06M bpd from 10.54M bpd in October last year. Yet, if one or two countries announce to quit the deal, it would collapse easily as others would be tempted to follow.

Earlier in Asian session, Australia reported that its current account deficit narrowed to AU$ 3.1B in 1Q17, from AU$ 3.9B a month ago. The market had anticipated a deficit of only AU$0.5B. Meanwhile, the RBA announced to leave the policy rate unchanged at 1.5%. Policymakers indicated that, "transition to lower levels of mining investment following the mining investment boom is almost complete". Meanwhile, "business conditions have improved and capacity utilization has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment". While acknowledging growth moderation in the first quarter, the central bank maintained the view that GDP growth would "increase gradually over the next couple of years to a little above +3%". On the job market, policymakers acknowledged the payroll growth but remained concerned over the subdued growth in total hours worked as well as wage growth remains. Policymakers warned that persistently low growth in wage would restrain household consumption.

Later today in Europe, the Sentix investor confidence index for the Eurozoe probably stayed unchanged at 27.4 in June. The retail sales for the region might have gained +0.1% m/m in April, down from +0.3% in the prior month.

 

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