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Saudi Bombs Yemen, Oil Prices Surge

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Brent has surged more than 4% towards $59/bbl Thursday following the commencement of military operations by Saudi Arabia and its Gulf Arab allies in Yemen, which is situated on a strategically important global oil chokepoint between the Arab Gulf and Europe.

In order to export oil to Europe, Arab producers have to send the crude past Yemen’s coastlines via the Gulf of Aden to get to the Suez Canal. According to maritime sources who spoke to Reuters, four Egyptian naval vessels have traveled through the Suez Canal on the way to Yemen to secure the Gulf of Aden.

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The Bab el-Mandeb Strait is a chokepoint between the Horn of Africa and the Middle East, and it is a strategic link between the Mediterranean Sea and the Indian Ocean. It is located between Yemen, Djibouti, and Eritrea, and connects the Red Sea with the Gulf of Aden and the Arabian Sea.

An estimated 3.8 M/bd of crude oil and refined petroleum products flowed through this waterway in 2013 toward Europe, the US, and Asia- an increase from 2.9 M/bd in 2009. Closure of the Bab el-Mandeb could keep tankers from the Persian Gulf from reaching the Suez Canal or SUMED Pipeline, diverting them around the southern tip of Africa, adding to transit time and cost.

The air strikes against Houthi rebels, who have driven the president from Yemen’s capital, are already raising fears within the market regarding the security of Middle East oil shipments. Security concerns are translated in the oil market to supply disruption fears. And the market has responded this morning.

Saudi Vs. Iran Proxy War

The airstrike launched Wednesday night against Shiite rebel forces in Yemen were in response to distress calls from the US-supported Yemeni president who was fleeing the country amid significant advances by the rebels.

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The strikes heighten the risk that Yemen will become the epicenter of a proxy war situating Saudi Arabia and other Sunni Arab countries against Shia Iran. They also manifest a significant escalation of complexity in the growing conflict in the region besetting several countries.

Even as Saudi forces began launching air strikes against the Shiite rebels, US fighter planes were providing support for Iran-supported Shiite fighters in Iraq’s war against ISIS, a Sunni extremist group. The Saudi ambassador, Adel al-Jubeir, issued a statement saying that the Royal Kingdom “will do anything necessary” to protect the people of Yemen and “the legitimate government of Yemen.”

The Saudi ambassador said that the Houthi rebels “have always chosen the path of violence.” He added that the bombing was occurring in coordination with 10 other countries, most of them reportedly other Sunni-dominated Arab nations.


View Reuters video of airstrikes:


The Saudi Press Agency released a statement Wednesday from nearly all members of the Gulf Cooperation Council (with exception of Oman) saying they would get involved in support of Yemeni President Abed Rabbo Mansour Hadi, who had sought their help against the Shiite Houthis, whom the GCC characterized as a “foreign tool.” This was an obvious reference to the Shia regime of Iran. The statement said that the GCC will “protect Yemen and his dear people from the aggression of the Houthi militias which were and are still a tool in the hands of foreign powers that don’t stop meddling with the security and stability of brotherly Yemen.” Egypt also released a statement late Wednesday and said it would provide naval and air forces, as well as ground troops, “if necessary.”

Meanwhile, Bernadette Meehan, a spokesperson for the US National Security Council, said in a statement late Wednesday that the US was involved. “President Obama has authorized the provision of logistical and intelligence support to GCC-led military operations in Yemen against the Houthis…While US forces are not taking direct military action in Yemen in support of this effort, we are establishing a Joint Planning Cell with Saudi Arabia to coordinate US military and intelligence support.”

The key reason why “US forces are not taking direct military action in Yemen” is simply because no American forces remain on the ground. The US embassy there was evacuated last month and the last US Special Forces were removed last week. Analysts cited by The Washington Times said this indicates the Obama administration recognizes that US military forces cannot significantly impact the trajectory of the quickly dissolving crisis.

3-Day Chart of WTI Shows Surge On Bombing News

Brent was up $2.32 at $58.80/bbl by 07:20 EDT. WTI was up $2.10 at $51.31/bbl. Brent and WTI prices spiked around 6% earlier in the session but pared gains in European trading. By 12:00 EDT, Brent was at $58.78/bbl, while WTI was at $50.81/bbl.

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Several months ago, we proposed and explored our “volatile nations” thesis, the grounding of which is a recognition that geopolitical instability- and the “episodes” that occur when this restiveness gives way to violence- can cause oil prices to spike immediately.

The key term here is “spike,” however. The global oversupply concerns, and the US production trend, obviously still exist. It is fears of a supply disruption (not an actual one) that have driven prices northward this morning. Depending on how the situation unfolds in coming days, specifically whether oil transportation via this key shipping route is impacted, the transitory nature of the price spike could become more enduring.

While the air strikes have not impacted key oil infrastructure of the main Gulf producers, there are fears that the conflict might spread. The Shiite Houthis have received some support from Iran, Saudi Arabia’s long-time rival for Middle Eastern dominance.

In response to the volatile security situation, Saudi Arabia Interior Minister Muhammad bin Nayef said Thursday that the country will be “strengthening all security measures on the borders of the kingdom and in all public utilities and around the oil and industrial facilities,” the Saudi Press Agency reported.

Yemen shut its major seaports on Thursday, local and industry sources told Reuters.

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