Why Bombing This Tiny Oil Producer Is Roiling the Energy Market

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Why Yemen Is Roiling the Oil Markets

While Yemen contributes less than 0.2 percent of global oil output, its location puts it near the center of world energy trade.

The nation shares a border with Saudi Arabia, the world’s biggest crude exporter, and sits on one side of a shipping chokepoint used by tankers heading West from the Persian Gulf. Global oil prices jumped more than 5 percent on Thursday after regional powers began bombing rebel targets in the country that produced less than Denmark in 2013.

Yemen’s government collapsed in the face of an offensive by rebels known as Houthis, prompting airstrikes led by Saudi Arabia, the biggest producer in the Organization of Petroleum Exporting Countries. The Gulf’s main Sunni Muslim power says the Houthis are tools of its Shiite rival Iran, another OPEC member, and has vowed to do what’s necessary to halt their advance.

“While thousands of barrels of oil from Yemen will not be noticed, millions from Saudi Arabia will matter,” said John Vautrain, who has more than 30 years of experience in the energy industry and is the head of Vautrain & Co., a consultant in Singapore. “Saudi Arabia has been concerned about unrest spreading from Yemen.”

Yemen produced about 133,000 barrels a day of oil in 2013, making it the 39th biggest producer, according to the U.S. Energy Information Administration. Output peaked at more than 440,000 barrels a day in 2001, the Energy Department’s statistical arm said on its website.

Shipping Chokepoint

Brent, the benchmark grade for more than half the world’s crude, gained 4.8 percent to $59.19 on the London-based ICE Futures Europe exchange. West Texas Intermediate futures, the U.S. marker, advanced 4.5 percent to $51.43 on the New York Mercantile Exchange.

Yemen is located on Bab el-Mandeb, the fourth-biggest shipping chokepoint in the world by volume, which is 18 miles wide at its narrowest point, according to the EIA. It’s located between Yemen, Djibouti, and Eritrea, and connects the Red Sea with the Gulf of Aden and the Arabian Sea.

In 2013, 3.8 million barrels a day of crude and oil products flowed through Bab el-Mandeb, EIA data show. More than half of the shipments moved to the Suez Canal and SUMED Pipeline, which link Egypt’s ports of Ain Sukhna on the Red Sea and Sidi Kerir on the Mediterranean.

“There is a possibility that pirates could use the general instability as cover to mount attacks in the southern Red Sea around and north of Bab el-Mandeb,” the Baltic and International Maritime Council, which represents owners and operators in 130 countries, said by e-mail.

The oil terminal at Aden on Yemen’s south coast is operating as normal, Harbor Master Shekib Abdelwahed said by phone Thursday. The European Union Naval Force isn’t aware of any disruption to shipping in the Gulf of Aden or Bab el-Mandeb, said Jacqui Sherriff, a spokeswoman for the combined naval units.

Transport Threat

Closure of the waterway may keep tankers from the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, diverting them around the southern tip of Africa, adding to transit time and cost, according to the EIA. Ships carrying oil from Europe and North Africa to Asian market wouldn’t be able to take the most direct route, it said on its website.

“As the situation in Yemen has dramatically escalated, it’s seen primarily as a threat to international shipping and oil transport,” Theodore Karasik, an independent geopolitical analyst, said from Dubai. “There’s concern that the more ungovernable Yemen becomes, the more it could become a base for piracy in the Red Sea area.”

Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Kuwait responded to a request from Yemen’s President Abdurabuh Mansur Hadi, according to a statement carried by the official Saudi Press Agency.

The strikes are a “very dangerous development” and contradict international law, al-Jazeera reported, citing the Iranian foreign ministry. The attacks will haunt Saudi Arabia as the war won’t be contained in one area, the state-run Fars news agency cited Alaeddin Boroujerdi, head of the Iranian parliament’s national security and foreign policy committee, as saying.

Proxy War

Saudi Arabia led OPEC’s decision in November to resist calls to reduce its output target of 30 million barrels a day, a resolution that Iranian Oil Minister Bijan Namdar Zanganeh said was “not in line with what we wanted.” OPEC’s decision, combined with the highest rate of U.S. production in more than 30 years, caused a supply glut that drove benchmark oil prices to six-year lows.

In Yemen, Iran and Saudi Arabia are “fighting a proxy war and they will continue to fight a proxy war,” Vautrain said.

The Houthis, who follow the Zaydi branch of Shiite Islam, say they operate independently of Iran and represent only their group’s interests.

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