Yemen conflict spooks oil prices higher

A U.S. Navy sailor readies bombs for loading onto jets last week on the deck of the USS Carl Vinson aircraft carrier in the Persian Gulf. Saudi Arabia’s involvement in a conflict against Iranian-backed rebels in Yemen is raising concerns about the safety of the region’s oil-supply routes.
A U.S. Navy sailor readies bombs for loading onto jets last week on the deck of the USS Carl Vinson aircraft carrier in the Persian Gulf. Saudi Arabia’s involvement in a conflict against Iranian-backed rebels in Yemen is raising concerns about the safety of the region’s oil-supply routes.

Volatility has entered the international oil market as escalating fighting in Yemen fuels concern about Middle East crude supplies.

While Yemen is a small oil producer, Saudi Arabia's involvement in the conflict against Iranian-backed rebels is raising concerns about stability in the region and the safety of a busy supply route.

For U.S. consumers this could mean a 5 cent or 10 cent increase in gasoline prices at the pump, analysts say, despite a domestic oil glut. Gasoline prices will remain about $1 cheaper than they were a year ago.

There have been no supply disruptions so far, and analysts said the likelihood of one is minimal, but apprehensions about broader conflict in the region sent oil prices up Thursday, making way for another jump in gasoline prices for U.S. consumers.

"Yes, Yemen is a marginal oil producer, but the fact that this is essentially a Sunni-Shia proxy war and its location on the Southern edge of the Arabian peninsula makes the violence much more impactful to global oil markets," Carlos Newall, an equity research associate with Raymond James and Associates, said in an email. "It's not about Yemeni oil coming off the market, it's about disruptive violence in the region."

Oil prices surged 4.5 percent Thursday after Saudi Arabia launched airstrikes in Yemen against Shiite rebels known as Houthis. The military campaign is bringing a new conflict between the Saudis and Iran, which is suspected of backing the Houthi rebels.

Saudi Arabia and its Arab allies have entered into the Yemen conflict after an advance by the Houthis sent the Yemen's president fleeing and left the rebels nearer to control of Yemen's two largest cities.

Yemen has been embroiled in conflict for months, and there were signs Thursday that the Saudi airstrikes could expand to a land war. The Associated Press reported that there would be a ground assault by Egyptian, Saudi and other forces.

In response to concerns about oil supplies, Brent crude prices rose $2.71 to $59.19 a barrel in London on Thursday. And West Texas Intermediate crude, the domestic benchmark, rose $2.22 to $51.43 a barrel on the New York Mercantile Exchange.

Analysts said the jump in oil prices will be limited -- lasting only a few days -- as the possibility of a disruption is low.

"I think after a day or two it will be obvious that the threat isn't spreading and that the market will come down again" said Michael Lynch, president of Strategic Energy and Economic Research Inc.

The concern for the oil market is the potential disruption of oil distribution.

"The players involved are two of the biggest producers in the OPEC cartel," said Phil Flynn, an energy analyst with Price Futures Group, referring to Saudi Arabia and Iran. "We're seeing a big escalation in the area -- in one of the most sensitive areas in the world when it comes to oil transportation."

The Bab el-Mandeb strait, off the west coast of Yemen, is an oil choke point. It connects the Red Sea with the Gulf of Aden and the Arabian Sea, and oil shipped through it goes to Europe, the United States and Asia.

About 3.8 million barrels of oil and petroleum products traveled through the strait per day in 2013, according to the U.S. Energy Information Administration.

Closure of the strait would force tankers to travel around the Horn of Africa, delaying crude deliveries by weeks.

An oversupplied oil market has led to lower prices since last summer. Because of the drop in crude prices, U.S. consumers have been enjoying some of the cheapest gasoline in years.

Individual households are expected to save $750 this year as a result of the drop in pump prices, according to the U.S. Energy Information Administration.

Retail gasoline prices averaged $2.42 a gallon nationwide and $2.21 a gallon in Arkansas on Thursday, according to AAA's fuel gauge report.

Analysts said Thursday that prices could see a lift as a result of the crisis in Yemen.

"I think the next 10 days you will see gas prices go up because we've seen a pretty big move in crude," said Tom Kloza, chief oil analyst for gasbuddy.com, a price-tracking website, adding that prices will increase by about 5 or 10 cents.

But, he said, "I still believe most U.S. cities are going to see gasoline prices that are at least a dollar cheaper than they were last spring."

Analysts say the global oil market will remain oversupplied.

"The global oil market is currently well supplied not least in the U.S. and this has so far helped reduced any supply worries related to geopolitical events," said Ole Hansen, head of commodity strategy for Saxo Bank in Denmark in an email.

"The upside for oil therefore looks limited ... but as we have seen on several occasions since the Arab Spring in 2011, oil market traders often set out worse-case scenarios, which then get adjusted over time when supply disruptions most often fail to materialize," he said.

Business on 03/27/2015

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