Oil and gold: down and up, or up and down

A little uncertainty in the global economy and commodity prices go haywire. The diplomatic rift between Saudi Arabia and its allies, and Qatar has left markets unsure once again. Let’s see how the market for crude oil and gold reacted to the rising aperture in the GCC world.

Usually, crude oil prices spike with a dash of geopolitical tension in the oil producing world (of late, oil glut and increased supplies have been overweighing some of these risks). Hence this was the first reaction to the surprise decision by Saudi Arabia to cut ties with Qatar as it left many investors perplexed.

However, oil prices flipped as the investors quickly realised that it was more of a supply driven phenomenon than a supply outage issue; oil prices retreated back to lows on the fear of the collapse of the historic agreement among Saudi Arabia and other OPEC members for production curtailment; if Qatar decides not to follow the agreed production quota, the agreement will be violated and other nations could follow, resulting in a failure of to keep prices from tumbling back to historic lows.

Where crude oil has now settled lower by almost five percent on account of the Qatar crisis along with unexpected increase in crude inventories by the US, gold prices have strengthened amid the current global situation. Gold prices touched the highest level for the first time after 2007. However, pinning gold price only to Saudi-Qatar tension would be wrong; the rush prices came from the political uncertainty linked to UK (UK elections), Europe (ECB monetary policy decision), and the US (Comey’s testimony). However, after the ECB’s decision to stay put on the rates and ruling out further rate cuts, as well as UK election results wiped off the gains in the precious metal.

Where crude oil and gold prices have been see-sawing, the Qatar crisis also stoked some concerns over supply disruptions in its export of LNG; Saudi Arabia, Egypt and UAE have significant reliance on imports from Qatar. Abu Dhabi has banned all ships from Qatar from entering its ports, while the UAE has stiffened its restrictions.