Why the collapse of Yemen is driving up oil prices

Oil prices saw a marked jump of more than 3% to $49.31 per barrel on Wednesday and it will probably not shock anyone to hear that it has something to do with Yemen. This comes after very recent speculation that the prices might have eventually dipped to near $30 per barrel by summer. But while it may sound obvious to the casual observer, should crude oil production in Yemen really have that large of an impact on the global market? Yemen produces roughly 133,000 barrels a day which isn’t chopped liver, but they still only rank 39th in global output, or roughly 0.2% of the global supply. Frankly, a fluctuation in the output of only Canada and the US in any given week can wipe out a significant portion of that.

So why would the market react so suddenly to a bombing campaign in Yemen? As with most things in global economics… it’s complicated. There are not only market factors at work, but global politics and the interference of Iran. (More on that below.)

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 crude 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…

“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’ 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.”

To be fair, the price change was also driven by a weakening of the US dollar, at least in part. But Yemen’s location on the Bab el-Mandeb strait means that the troubles are taking place on one of the largest “choke points” for oil tankers in the world. There has thus far been absolutely zero disruption to the flow as a result of the military action in Yemen, but the concern for such a possibility is enough to send shudders through the market.

The reality is that oil, just like any other publicly traded commodity, does not have some testable “value” assigned to it. Oil is worth precisely as much as someone else is willing to pay for it… no more and no less. It’s true that the overall supply as balanced against the volume in demand is the primary driver, but that in and of itself is also a function of “what the market will bear.” When people become skittish and are guessing that the supply may drop in the near future, they will put in larger orders to try to trim some cost off their supply side. This introduces an artificial spike in demand with predictable results.

But there is probably some meddling going on from a familiar source, and that will eventually exert pressure on prices as well. Energy industry analyst John Vautrain monitors these events and is confident that Iran is fighting a proxy war which will work to their benefit in a number of ways.

OPEC’s decision and an expanding U.S. supply glut have driven global benchmark oil prices to a six-year low.

“In the longer term, Iran will be happy to disrupt oil supplies,” Vautrain said. “They literally want to control Saudi Arabia and Iraq. They would love that. They’re fighting a proxy war and they will continue to fight a proxy war.”

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

This is yet another situation where events which are bad for nearly everyone else turn out to be good news for Iran. These events could not only expand their sphere of control in the region, but eventually put more money in their coffers. It’s a win – win with some death and destruction on the side.

But again, as we said at the top, the final prices we are all paying for oil may still go in either direction this Spring. It’s just complicated.

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