Oil traders brace for Yemen ground war

Oil traders brace for Yemen ground war
Initial expectations of a rise in oil prices over the Yemen conflict have diminished. But a ground offensive could change that.
3 min read
01 April, 2015

Oil analysts had thought Operation Decisive Storm might provoke an increase in the price of oil. Over the first few days of the Saudi air raids on Yemen, the price of Brent crude went up 5 percent to $60 per barrel, while US crude rose to $52.

But prices quickly fell back as concerns over supplies on the world market diminished, for several reasons. Analysts now say there will be no significant oil price rise unless the Arab coalition launches a ground offensive against the Houthis, or unless Iran, an OPEC member-state, gets involved in the war.

Oil market observers are in broad agreement that Iran's failure to intervene – not surprising, given that its negotiations with the West on nuclear power development are at a very delicate stage – into support its allies in Yemen was a factor in oil prices not rising sharply. Nor have the Houthis themselves carried out some of the moves they threatened, such as blocking shipments through Bab-el-Mandeb to the Suez Canal.

One oil analyst, Abdul Qadir Abdul Hamid, told Al-Araby al-Jadeed: "Movements in the price of oil will depend on developments in the conflict. If it shifts from air raids to a ground offensive, it is likely to last longer and very possibly both affect Yemen's own oil exports and obstruct the passage of oil from most of the Gulf states to the West, especially Saudi Arabia, which produces around 10m barrels per day and exports around 7.5m."

Abdul Hamid warned that any disruption in supply from the Gulf would open the door to the US shale oil industry to boosting its market share to offset the shortage of international supplies. He also said that Iran would be unlikely to benefit if there was a price hike given its serious economic difficulties, compounded by continuing trade sanctions and the financial costs of its intervention in Syria and Iraq.

Oil experts said another possible cause of an oil price hike could be an attack on oil installations in the Gulf. But the chances of this taking place are thought to be slim, given that the Saudis are now in control of Yemeni airspace and that there is very tight security at Gulf oil facilities.

On 30 January, the World Bank reported that sustained low oil prices were costing the Gulf states around 14 percent of their combined GDP, over $215bn. Oil revenues accounted for more than half the GDP of the Gulf states, and 75 percent of their export revenue, in 2013. If the average price of a barrel of oil sinks to $65, the World Bank noted, Saudi Arabia would suffer a 1.9 percent GDP deficit, Bahrain 5.3 percent, Oman 11.6 percent, and the UAE 3.7 percent.

A week earlier the CEO of the International Monetary Fund, Christine Lagarde, had said she expected the Gulf to lose $300bn as a result of plummeting oil prices.