What to expect from the gold and oil markets

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Global markets writer, Neil Buckland, analyses the effects of the ongoing Gulf blockade, on the international markets.

The current political tensions in the Gulf are the worst that have been seen in years, and are already having some effects on the markets, however it seems that investors outside of the region have been against picking sides and have instead turned their attention to the more fundamental economic matter of oil prices.

Stalemate in the Gulf

It has been over seven weeks since sanctions were first placed on Qatar. The political situation seems to have reached a kind of stalemate. Qatari passport holders currently have severe travel bans placed on them, and business in the tiny country is being strongly impacted as the sanctions make it very difficult for Qatar to do business with other countries, as well as the group of Arab nations including the UAE and Saudi Arabia that are enforcing them.

The Economic Intelligence Unit (EIU) released a white paper on July 16, warning businesses of the potential risks that would be associated with carrying on dealing with Qatar in the current political situation. The white paper warns that they expect tensions “to take years — rather than months — to resolve, owing to the deep level of mutual distrust between Qatar and its Arab neighbours.” It goes on to say the situation will “undermine business and investment sentiment in the Gulf region, with Qatar bearing most of the brunt.”

With no resolution apparent, the markets seem to be favouring no one side, despite the warnings from the EIU, and their interests have been focused on oil.

Oil prices still low

A pressing concern in oil rich nations of late has been the low oil prices that have been seen for the past three years. OPEC and non-OPEC nations have combined in an agreement to limit production since the start of the year, and this was extended last month as it has not yet addressed the supply glut and prices are still sitting at under $50 a barrel. Analysts from major sources like JP Morgan Chase & Co have stated that investors seem far more concerned with oil than with the feuds between the Middle Eastern nations, and have been putting equal risk weighting to both Saudi Arabian and Qatari investments.

According to JP Morgan Chase & Co’s Saad Saddiquil, who is a Director for Emerging Market Strategy based in London, “still the biggest macro-driver, it’s the tide which lifts or sinks all boats,”

He, like many, believes the OPEC crisis is a bigger problem on investors’ minds at the moment than Qatar’s sanctions.

At present, only Libya and Nigeria are exempt from cuts to oil production, and OPEC report that compliance with the agreement has been going well. There is speculation over whether Libya and Nigeria will also be asked to limit their crude oil production in the near future, which may finally cause some changes in the market.

Oil prices are a big problem on the markets this year, and while efforts are being made all over the world to reduce oversupply, reduce the glut and balance supply and demand to push prices back up, as yet the measures taken do not appear to have been enough.

Will a prolonged Middle Eastern stalemate lead to a change in gold prices?

Gold is always seen as something of a safe haven for investors, and so it is possible that those concerned about the situation in the Gulf may well begin to use it as a place to keep their money while they see how things play out. It is as yet unknown whether this crisis really will take years to resolve as the EIU suggests, or will escalate, or even be resolved quickly and peacefully with Qatar agreeing to demands. Should it be a drawn-out period of tension, however; it is very likely that this will affect the price of gold and cause it to rise, so for those who follow the gold price markets this is a situation to keep an eye on.

It is very hard to tell what kind of outcomes we can expect even in terms of oil and gold prices while the situation is in stalemate and there is so much else affecting the oil situation. However, it seems apparent that the market is hedging its bets when it comes to this conflict rather than choosing a side.

 

Author biography: Neil Buckland is a Leeds Business School University graduate and has been working in the Digital Industry for five years now. With a particular interest in business and global markets, he has been writing content for various publications since graduating in 2012.  When he is not writing, you can find him on the pitch for 5-a-side, reading or enjoying the occasional online video game challenge.

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