Anyone who follows oil prices would have noticed the jump this week as Saudi Arabia launched airstrikes in Yemen. We view this conflict as having little immediate impact on the oil markets.
Let’s go over a few facts. Yemen currently produces only 130,000 barrels per day (b/d) of oil. To put that in perspective, Yemen’s annual output is equivalent to what the U.S. added each month last year.
Yemen sits next to the Bab el-Mandeb Strait, where just under 4 million b/d of crude oil passes. Some have speculated that this passageway, which the U.S. Energy Information Administration notes is one of the top five global choke points, is at risk. We disagree. We think the Houthi rebels have neither the capacity nor the incentive to shut the strait. What’s more, if any crude oil shipping issues were to arise, they would most likely be an inconvenience as ships reroute – not an event that affects global balances. Oil price rallies have little durability without real production issues.
The big concern is the stability of Saudi Arabia. As the Organization of the Petroleum Exporting Countries’ (OPEC) largest producer and the only producer with material spare capacity, stability within the country is paramount for stability in oil prices. The recent events in Yemen (as well as Tunisia) bring focus to the highly unstable situation in the region.
It comes down to this: In the oil market, investors need to live with the uncertainties.