Why Yemen has the power to rally international oil prices

21:38 26 March in Latest News

Yemen produces roughly 130,000 barrels of crude oil a day, but it still has the power to rally oil prices.

It is all about location. It sits at the Bab el-Mandab Strait, a key chokepoint in international shipping—making it important in terms of international energy trade, according to the U.S. Energy Information Administration.

About 3.8 million barrels of oil a day passed through Bab el-Mandeb in 2013, and a closure of the Strait would keep tankers in the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, forcing them around the tip of Africa, the EIA said.

Even if you don’t know anything about geography, it is obvious that a closure would severely disrupt oil transport in the region.

With Saudi Arabia and other Gulf nations having launched airstrikes against rebel forces in Yemen’s capital and across the country, there is potential for a closure of the Strait. That’s on top of the fact that Saudi Arabia, the largest oil producer in the Middle East, has gotten involved.

“Obviously, when you have Saudi Arabia and the Arabian peninsula involved in military operations, the world takes notice,’ said Ken Crawford, a portfolio manager at Argent Capital Management in St. Louis.

On Wednesday after Yemen’s President Abed Rabbo Mansour Hadi fled the southern port city of Aden by boat as Iranian-backed Houthi militants closed in, crude for May delivery on the New York Mercantile Exchange CLK5, +3.64%  settled with a gain of 3.6%. Brent crude on the ICE Futures exchange rose 2.5%. Both continued to trade sharply higher on Thursday following news of the airstrikes.

Yemen “not only has the potential threat to 3.8 million barrels a day of crude and products through Bab el-Mandeb, but its long border with Saudi Arabia and the Iranian support of the Houthis combined with the presence of al Qaeda in Yemen create a longer-term threat for the Saudis,” said James Williams, an energy economist at WTRG Economics.

And “the importance of the Strait is underscored by Egypt’s participation,” he said. Egypt has said it could send a ground force if necessary.

But some analysts don’t believe the oil rally will last.

“When it becomes clear that the military action is limited to areas far distant from the Saudi oil fields and border, and that the threat of a wider conflict is small, prices should retreat to previous levels,” said Michael Lynch, president of Strategic Energy & Economic Research (SEER).