War In Yemen And Oil Prices

 The Conflict 

Saudi Arabia has initiated airstrikes in Yemen which has caused a surge in oil prices on the fears over the instability of Middle East. The oil markets have reacted clearly due to concerns over the increasing violence in Arabian Peninsula, which puts Saudi Arabia in confrontation with Iran in proxy war on Yemeni grounds. Saudi Arabia is mainly attacking Shia rebels who are seeking to overturn the Saudi Arabia backed government in Yemen. Reuters reported that Saudi aircrafts targeted an air base and airport occupied by the Houthi rebels, which took hold of Yemen’s capital Sanaa in last September.

The regional conflict encompasses a complicated pattern of geographical rivalries. The U.S. has announced its support for Saudi Arabia which will be confined to only “ intelligence and logistical”. Iran has decried Saudi Arabia’s airstrikes. The United Arab Emirates has condemned Iranian interference in the Gulf region. Meanwhile Iran and the U.S. find each other on same side when in comes to their strikes  in Iraq on ISIS, although their attacks are not jointly coordinated.

The Impact on Oil Prices and Yemen’s Oil Production

The overnight sudden airstrike by Saudi Arabia pushed oil prices to rush upwards. For the very first time during past several weeks, West Texas Intermediate has escalated over $50 per barrel. Brent crude plunged up to $58 per barrel. Oil prices have increased by 13 % alone in last week. The upsurge comes surrounded by the increasing concerns of overflowing oil storage tanks across the United States and also around the globe, which poses a threat of the new round of weak oil prices.

Nonetheless, the oil markets are greatly overreacting. Yemen’s oil production is negligent, and any disturbance to its supply would barely be felt by the global market. Not only Yemen produces very little quantities of oil, but her production is declining for the past 15 years. Yemen is currently producing oil less than 150,000 barrels per day, which translates as1/20th of the quantity that state of Texas alone produces every day.

The Reason; Yemen’s Oil Production or Yemen Geographical Location?

Therefore, the global oil markets are vastly concerned over the strategic location of Yemen. Yemen is the next door neighbor of the most significant oil producer in world, which is situated along Bab el Mandeb which is a narrow channel of water which links the Gulf of Aden to the Red Sea. In simple words, it connects the oil carriers from the Mediterranean sea enroute Indian Ocean. According to an estimate oil supply of 3.8 million barrels travels daily via these strait.

Theoretically, the violence could grow into the supply disruptions at this 18-mile broad strait, which is highly unlikely to occur. After all, the United States Navy constantly patrols this region. Furthermore, the Houthi rebels don’t have a heavy maritime presence. Which means that, the violence would supposedly remain onshore.

Recovery of Prices Back to Normal

Having said all this, when the initial rounds of Saudi Arabia’s airstrikes wear off, global oil prices would likely cut back their ups as the oil traders concentrate on fundamentals which haven’t let them sleep at night during recent weeks. Storage of Crude oil at Cushing is ¾ full. The strategic petroleum reserves of China are nearly full.The U.S. oil refineries are closing down temporarily for the Spring maintenance. All of these factors will push down the prices of oil back to normal.

The recent violence in Yemen is a much serious humanitarian and geopolitical concern, but until this regional conflict between Iran and Saudi Arabia transforms into a more broader and direct ground clash, there is minor justification for the global oil markets to rattled so much.