Saudi intervention in Yemen sends oil higher on fear for vital tanker route

Conflicts in the Middle East see Iran and Saudi Arabia jockeying for power

Oil prices rose sharply last week amid concerns that fighting in the Arabian Peninsula between a Saudi-led coalition and Houthi rebels in Yemen could disrupt supplies. While Yemen is a minor-league oil producer, the fact that Saudi Arabia, the country's northern neighbour and one of the world's leading oil exporters, had become embroiled in an armed conflict roiled the market, even though analysts said there was very little near-term chance of a disruption in petroleum production.

What might matter more, they said, is the longer-term market impact of rising geopolitical tensions in the Middle East. “This is a subset of a broader regional conflict, and as it intensifies, the odds of it affecting a major oil producer continue to rise,” said Seth Kleinman, an analyst at Citigroup in London.

Those general jitters could explain why oil prices spiked in early European trading on Thursday after news that Saudi Arabia had bombed targets in Yemen.

The price of West Texas intermediate crude, the main US benchmark, rose about 4.5 per cent in the hours after news of the intervention emerged, while Brent crude, the widely used international reference, rose about 4 per cent. Prices eased somewhat during the day, as traders figured that the possibility of an immediate disruption in output was remote.

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Both benchmarks are up more than 10 per cent from the multiyear lows they reached in mid-March – although they are still down about 40 per cent from their prices a year ago.

“I think it’s a very minimal risk to oil supplies,” said Rachel Ziemba, a Middle East analyst at Roubini Global Economics, a financial research firm, said of the Saudi strikes. “It is important to remember that Yemen is not a major producer; in fact, that there is a Saudi-led operation in Yemen, which has been a failed state for some time, should not be a surprise.”

But Ziemba and other analysts said that the Saudi intervention came as a reminder that geopolitical tensions in the Middle East – still the world’s most important oil producing region – remain high, and appear to be rising. The civil war in Syria is showing little sign of winding down, and parts of Iraq remain conflict zones.

A theme that runs through these conflicts is the jockeying for power between Saudi Arabia and Iran, two of the most powerful countries in the region, as well as in the Organisation of the Petroleum Exporting Countries.

In Yemen, for instance, Iran backs the rebels, while Saudi Arabia has tried to prop up the beleaguered president.

Iran and other Opec countries are unhappy with the recent Saudi policy of declining to cut production to prop up prices. In fact, the Saudis appear to be increasing their output, analysts say.

“The market has begun to react to geopolitical supply risks once again, a trend that has been largely absent in recent months, underscoring how fundamentals have shifted,” said Richard Mallinson, an analyst at Energy Aspects, a London-based market research firm.

Still, most analysts say there is a strong possibility that oil prices will head down again. The market remains oversupplied, although there is debate about the magnitude of the glut. Demand usually weakens in the second quarter of the year as winter winds down in the northern hemisphere and refineries shut down for maintenance.

In addition, oil supplies have built up to high levels in storage tanks in the United States, partly because, as a matter of government policy, US companies are not allowed to export surplus crude.

A deal between the United States and Iran over Tehran’s nuclear programme would lead eventually to a rise in Iranian oil exports, adding to levels of crude.

Analysts say that in the coming weeks, the oil markets may be whipsawed as participants try to reconcile the continuing oversupply with Middle East turmoil.

“It is always a funny congruence when you have high political risk but also very weak market fundamentals,” said Michael Lynch, president of Strategic Energy and Economic Research, an information and consulting service in Massachusetts. “It is the kind of thing that makes traders happy because they see volatility ahead.”

The Saudi bombing began as Yemen slid toward civil war, and the Houthi rebels, who have received support from Iran, were close to seizing the southern port of Aden, where Yemen’s president, Abdu Rabbu Mansour Hadi, has been hiding.

Although the Saudis said they were suspending civil aviation in the southern part of the kingdom near Yemen, the fighting is a long way from the main Saudi oil production centres in the east and poses little threat to the huge oil industry there, analysts said.

The conflict could further reduce Yemen’s modest oil production, which, because of disruptions and lack of investment, dropped to 130,000 barrels a day last year, less than a third of what the country produced at a peak in 2001. But Yemen’s production is a tiny fraction of world output and is unlikely to be missed.

Of greater concern is Yemen's location on the Bab el-Mandeb Strait, a narrow choke point between Yemen and Africa through which tankers and other ships pass as they head around the Arabian Peninsula and up the Red Sea toward the Suez Canal.

According to the Energy Information Administration, an arm of the US government, about 7 per cent of world maritime oil trade went through that passage in 2013.

If the route were closed, ships would need to go around Africa, a much longer journey. – Copyright New York Times 2015