Saudi Arabia’s decision to send troops to the borders of war-torn Yemen has jolted global oil markets, sending crude prices up 6 percent on fears of supply disruptions.
Higher oil prices are just what the Kingdom needs after months of having to take money from their reserves to finance government programs. News of Saudi air strikes on the Yemeni capital and an Arab offensive to push back the Iran-backed Houthi rebels sent oil up more than $3, to a two and a half week high of about $60 per barrel. Prices then settled back down to around $59 a barrel.
Saudi Arabia and other OPEC countries have been hit hard by low crude oil prices. Since June 2014, crude prices have slid from $115 per barrel to around $45 per barrel in January 2015. OPEC countries are expected to lose hundreds of billions of dollars in export revenues.
For now, the Saudi budget has been largely insulated from low oil prices. The latest data shows the Kingdom was running a $39 billion budget deficit due to low prices, but had ample reserves in its sovereign wealth fund to make up the shortfall — that is, unless oil prices stay low for too long.
In 2013, the Saudis needed oil to cost $92 a barrel to keep their finances in the black. Currently prices are at $56 per barrel, sliding further since the news of the Saudi offensive into Yemen.
“The impact of Saudi Arabia’s air strikes in Yemen is complex,” Peter Chatwell, a market strategist at Mizuho, told Reuters. “It’s geopolitical risk, so [German] Bund bullish, but the rise in the oil price should push expectations of headline inflation higher over the coming months.”
U.S. oil prices also jumped on the news, topping $51 per barrel, and Russia saw the rouble gain 1.4 percent against the dollar — no doubt a welcome sign after months of economic calamity.
While Yemen itself is not a major world oil supplier, markets see the Saudi offensive as a proxy war against Iran, the world’s largest Shia Muslim country. They have a long and troubled history with the Wahabist Saudis, so markets are paying particularly close attention to the conflict in Yemen.
If the war spreads, oil flows could be disrupted. Yemen itself sits along a major world oil trade route to the Suez Canal at a choke point called Bab el-Mandeb where oil tanker traffic is limited to a couple of two-mile wide channels. Energy Information Administration data shows that “3.8 million [barrels per day] of crude oil and refined petroleum products” flowed through Bab el-Mandeb in 2013.
“Closing the Bab el-Mandeb Strait could keep tankers in the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, diverting them around the southern tip of Africa,” EIA notes.
There are also worries that the Straits of Hormuz could be shut off by Iran if the war spreads beyond Yemen.
“It is becoming like a proxy war between Sunnis (in Saudi Arabia) and Shi’ites (in Iran) so it is a source of concern,” Norihiro Fujito with Mitsubishi UFJ Morgan Stanley Securities, told CNBC.
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