The Saudis and their allies spent the past four months orchestrating an oil price decline, but in one belligerent move Riyadh pushed oil prices higher Thursday, by as much as 6% at one stage.
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Saudi Arabia and nine regional allies launched air strikes on Yemen, their impoverished southern neighbour, in a bid to beat back Shiaa Houthi militia forces that are determined to takeover the country.
Yemen produced a mere 130,000-barrels per day last year, but oil markets have been fired up on fears that the conflict could escalate and hit Gulf oil facilities. Saudi Arabia and Kuwait said they have taken measures to strengthen security around their oil installations.
“Just because Saudi Arabia and others conducted air strikes doesn’t mean the oil market becomes suddenly tight,” said Masak Sumetsu, manager of the energy team at Brokerage Newedge in Tokyo, told Reuters. “But there will be repercussions. If Saudi’s oil facilities are attacked, the impact would be huge.”
More crucially, Yemen is located at Bab el-Mandab, a strategic 32-kilometre wide shipping corridor that connects to the Suez Canal and ships as much as 3.8 million bpd (or 4% of global production) to the United States, Europe and Asia.
“Closure of the two-mile strait would force tankers to sail around the southern tip of Africa to reach European, North American, and South American markets,” according to the U.S. Department of Energy. If the corridor is blocked, the alternative route via the Cape of Good Hope would raise tanker costs to US$150,000 from US$45,000.
Having Yemen fail cannot be an option for us or for our coalition partners
One of the Arab World’s poorest countries with poverty levels at 42%, Yemen’s latest troubles can be traced back to a popular revolt that forced long-time president Ali Abdullah Saleh to hand over the reins to his deputy Abd Rabbuh Mansir Hadi in 2012. Despite efforts of reconciliation with the Shi’ite Houthis and other groups, Mr. Hadi reportedly fled the country on a boat this week as the group took over the capital and put a bounty on his head. Former president Saleh, who once called governing Yemen “dancing on the head of snakes,” is seen as backing the Houthis.
“Yemen has 24 million people [and] 12 million guns – second-highest per capita globally – and sharp tribal differences, particularly between the North and South, who fought a bloody civil war in the ’90s,” said Emad Mostaque, analyst with London-based Ecstrat.
The Houthis are also waging war against Al Qaeda Yemeni branch, a common enemy of the U.S., Saudi Arabia and Iran. But in an example of how crossed the regional wires are, the Houthis flag bears the slogan: “God is Great, Death to America, Death to Israel, Curse on the Jews, Victory to Islam”.
Bloomberg Yemen produced a mere 130,000-barrels per day last year, but oil markets have been fired up on fears that the conflict could escalate and hit Gulf oil facilities.
Saudi Arabia, fearing the Shiite group has the backing of Iran, has committed 100 warplanes and 150,000 soldiers to “Operation Decisive Storm”.
“We are determined to protect the legitimate government of Yemen,” Saudi ambassador Adel al-Jubeir told reporters in Washington Thursday. “Having Yemen fail cannot be an option for us or for our coalition partners.”
Ms. Mostaque says Yemen is not necessarily aligning with Iran, rather it’s the re-emergence of Mr. Saleh, “a snake charmer playing a number of sides to his advantage.”
Citigroup Global Markets Inc. says the Yemen conflict “reflects an increasingly bullish geopolitical backdrop” for crude oil, that includes separate, but politically disruptive developments in important oil producing countries Russia, Venezuela and Nigeria.
As Brent ended the day 5% up to US$59.19, the biggest market fear is that Yemen is yet another battleground in an ever-expanding proxy conflict between Iran and Saudi Arabia.
MOHAMMED HUWAIS/AFP/Getty Images Yemeni civilians stands at the site of a Saudi air strike against Huthi rebels near Sanaa Airport on March 26, 2015.
“Saudi Arabia has announced a blockade could be in the works, while Iran has made a commitment to supply fuel to the Houthis via sea, potentially signalling a further flashpoint,” Citi analyst Seth Kleinman said in a note to clients.
Saudi Arabia is also frustrated that Washington is proceeding with a nuclear deal with Iran, which it believes will strengthen Tehran’s hand at a time when it is already enjoys considerable influence in Iraq, Syria and Lebanon.
David Anderson, a Barclays Capital Inc. analyst who visited Saudi Arabia and the United Arab Emirates in early March says that a “surprising amount” of the region’s oil players think Tehran will secure a deal with Western powers.
It’s not clear whether Yemen’s oil production has been paralyzed by the raging conflict, as its oil production is already cut by about 70% in recent years. The country’s oil infrastructure suffered 24 attacks in 2013 alone, according to the U.S. Department of Energy.
CNOOC’s Calgary-based Nexen Energy said it thoroughly reviewed its operations in Yemen and determined that its exploration block was “not economic.”
“On February 11, 2015 we notified the Yemen Ministry of Oil of our plans to relinquish our operations, and are working closely with our employees and the Yemen government to safely transition the operations,” Nexen spokesperson Diane Kossman said in an email.
Calgary-based Calvalley Petroleum Inc., a TSX-listed company, said late Wednesday its operating partner in Yemen had suspended operations and shut down one of its facilities. The venture produces 3,600-bpd.
French oil major Total SA said its office in the Yemeni capital was closed but its 6.7 million-tonnes-a-year LNG plant had not been impacted by military action in the country.
Calgary-based TransGlobe Energy Corp. said this month its earnings were hit in the fourth quarter owing to a $51.5-million writedown of its Yemen properties, “down to a net book value of zero.” The company also wrote off $6.1-million for another Yemeni property “since there are no plans for further spending on the exploration block until political and security issues are resolved.”