Why the Crisis in Yemen Could Get Ugly Very Fast

The last 24 hours have provided a stark reminder of the immediate impact geopolitical events can have on oil prices.

This time there’s a crisis in Yemen, and it’s about to take a turn for the worse.

As a result, I’ve been asked to provide my analysis on CNBC’s Closing Bell at 4:10 p.m. today to discuss the impact the crisis will have on oil prices.

But, as always, I wanted to give you a quick heads-up on what I am going to say and the rationale behind it.

This crisis is already having a big impact on the price of crude…

Oil Jumps as Yemen Burns

By mid-morning today, West Texas Intermediate (WTI) was up over 6% in less than 18 hours. Meanwhile Brent was up more than 5%, and was showing signs that it might be accelerating.

Behind this dramatic jump in price is the initiation of air strikes against Houthis rebels in Yemen by Saudi-led coalition forces.

As reported by Saudi-owned Al-Arabiya TV, the coalition includes the UAE, Bahrain, Kuwait, Qatar, Jordan, Morocco, and Sudan sending aircraft, while Egypt, Jordan, Sudan, and Pakistan were ready to take part in any ground offensive. As part of the offensive, the U.S. was providing “logistical and intelligence support.”

Some of these airstrikes are being directed at the Al Anad air base, which was captured by rebels earlier yesterday. Until a few months ago, this was the base the U.S. used to launch counter-terrorism operations in the region, especially against ISIS in Iraq.

But how quickly things have changed since then…

As it stands, the immediate impact on oil trading routes is minimal. Yemen is located at the southwestern tip of the Arabian Peninsula at the entrance to the Red Sea, and a short boat ride from the Horn of Africa (hardly a stable place itself these days).

Given its location, little direct oil traffic moves north from here. The primary Saudi East-West Petroline oil pipeline connects to Yanbu on the coast well north of Yemen. About 5 million barrels a day travel via that route.

As you can see, the Saudis do have an extensive border with Yemen, and they have been moving troops to points along the border over the past few days, leading to speculation that ground forces may be next. The Yemeni port of Aden is currently under siege, and the current president is either in hiding or has already left the country.

Following the Arab Spring two years ago, Abdu Rabbu Mansour Hadi took over the presidency from long-time strongman Ali Abdullah Saleh. Saleh has the support of the Houthis, and they now control most of the country’s military, including the air force.

That makes the U.S. and regional response much more difficult. In fact, the situation has all the hallmarks of a bloodbath just waiting to happen.

Dangerous Times Ahead

This is the fourth country in the area to unravel since the first Arab Spring unfolded – after Syria, Libya, and the ISIS insurgency in Iraq.

But this one is very different and far more deadly. The makeup of the parties involved is the real concern rattling the oil markets, not the direct impact of the crisis on current oil trading routes.

With the exception of events in the tiny country of Bahrain, the first Arab Spring was able to avoid the powder keg issue.

But not this time.

The besieged government in Sana’a, the Yemeni capital, is Sunni. The Houthis are Shiite, and strongly supported by Iran. The airstrikes yesterday have sunk Saudi-Iranian relations to their worst levels in decades.

Tehran has since condemned the attacks as an invasion, and promise all the help necessary to repel it. Ground troops that have amassed on the Saudi side of the border are likely to cross over into Yemen shortly.

As a result, I would not expect any further progress in the 5+1 nuclear talk with Iran from this point forward either.

Unless Iran moves to block the Strait of Hormuz in reprisal to the Saudi strikes, a reaction that would affect 20% of global crude oil exports and immediately bring in the U.S. fleet, oil prices should begin to recede a bit.

But that reprieve may not last very long.

As I have noted several times over the past month, the Arab Spring II will be much nastier than the first round of uprisings, especially if the Sunni-Shiite division becomes a central issue.

Keep in mind that countries in the region essentially bought off the opposition two years ago with massive additions to social welfare programs and government grants. All of them were funded when oil prices were much higher.

They do not have that luxury this time.

Again, be sure to tune into CNBC today at 4:10 to get all of the most current details. This could get ugly fast.

The post Why the Crisis in Yemen Could Get Ugly Very Fast appeared first on Oil & Energy Investor | Dr. Kent Moors.

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