Oil rises to 2-week high as Saudi Arabia bombs targets in Yemen

3/26/2015

GRANT SMITH

LONDON (Bloomberg) -- Oil climbed to the highest in more than two weeks in London as Saudi Arabia and its allies bombed rebel targets in Yemen, which is near the center of global energy trade.

Futures surged as much as 5.8%, paring a monthly decline. Saudi Arabia led a coalition of 10 Sunni-ruled nations in airstrikes against Shiite Houthi positions after an appeal from Yemen’s President Abdurabuh Mansur Hadi. The 10 countries produced about 21 MMbopd in October, or 22% of global supplies, according to Energy Information Administration data.

Yemen is located on Bab el-Mandeb, the fourth-biggest shipping chokepoint in the world by volume, according to the EIA. A total of 3.8 MMbpd of crude and oil products passed through Bab el-Mandeb in 2013, the EIA estimates. Yemen contributes less than 0.2% of global oil output, making it the world’s 39th-largest producer, according to the Energy Department’s statistical arm.

“The Saudi airstrikes and the fears the conflict will spill over into Saudi territory are driving prices for now,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd., said by email from London. “As there’s really no risk of Saudi supplies being impacted, the rise is overdone and we expect it to correct downwards.”

Shipping Chokepoint

Brent for May settlement climbed as much as $3.30, or 5.8%, to $59.78/bbl on the London-based ICE Futures Europe exchange, the highest since March 9. The contract traded at $58.59/bbl as of 11:15 a.m. local time. Prices dropped 6.1% this month. The European benchmark crude was at a premium of $7.42 to WTI.

West Texas Intermediate for May delivery gained as much as $3.27 to $52.48/bbl in electronic trading on the New York Mercantile Exchange and last traded at $51.07/bbl. The volume of all futures traded was more than twice the 100-day average for the time of day. Prices gained about 17% in the past five days.

“As an oil producer, Yemen is of no great significance in itself,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt said in a report. “Its geographical position is highly relevant. It is questionable whether this conflict will really have any lasting impact on the oil market, however. Risk premiums can disappear as quickly as they rise.”

Closing the 2 mile Bab el-Mandeb strait that links the Gulf of Aden and the Red Sea would force tankers to sail around the southern tip of Africa to reach European, North American and South American markets.

Sunni Coalition

Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Kuwait responded to a request from Yemen’s president, according to a statement carried by the official Saudi Press Agency. Egypt, Pakistan, Jordan, Morocco and Sudan are also part of the operation, according to Al Arabiya TV, bringing the total number of aircraft involved to 185. The airstrikes on Sana’a, the capital, came after forces loyal to the Houthi rebels marched on the southern port city of Aden.

U.S. President Barack Obama has “authorized the provision of logistical and intelligence support” for the operation, the White House said in a statement.

Saudi Arabia, the Persian Gulf’s main Sunni Muslim power, says the Houthis are tools of its Shiite rival Iran and has vowed to do what’s necessary to halt their advance. The strikes are a “very dangerous development” and contradict international law, al-Jazeera reported, citing the Iranian foreign ministry.

Saudi Arabia produced 9.85 MMbopd in February, making it the biggest producer in the Organization of Petroleum Exporting Countries, according to data compiled by Bloomberg. Iran is the fifth-largest with output of 2.78 MMbopd.

U.S. Glut

U.S. crude inventories and production swelled last week to the highest levels in more than three decades. Crude stockpiles increased by 8.2 MMbbl to 466.7 MMbbl through March 20, the highest level in weekly EIA records dating back to August 1982. Production accelerated to 9.42 MMbopd, the fastest pace since at least January 1983.

The number of outstanding options contracts that pay out if oil hits $100/bbl by December 2018 was 1,733 at the beginning of last week, according to exchange data. That’s surged to 2,743, or about 2.7 MMbbl, representing 0.08% of the 3.4 million options contracts outstanding.

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