Baku, Azerbaijan, March 29
By Aygun Badalova - Trend:
The recent developments in Yemen have caused oil prices to jump on fears of disruption to supplies, however the impact on production likely to be minimal, Thom Pugh, commodities economist at British economic research and consulting company Capital Economics believes.
In a report, obtained by Trend, Pugh said that even in the unlikely event of transport routes being affected, it should only add around $3-4 onto the price of a barrel of oil.
The confrontation between the Houthi rebels (a Shia group) and the government in Yemen has in recent months seriously aggravated. Houthis actually have seized the power in Yemen. Following a request from Yemen's President, Abd-Rabbu Hadi, Saudi Arabia and its allies launched air strikes in Yemen in an attempt to halt the Houthi's advance. The Houthis retaliated by firing rockets into the Kingdom.
In response to these latest developments, the price of Brent initially jumped by around 6 percent to more than $60 per barrel, but has since fallen back, the report mentioned.
"The main concerns for the oil market seem to be that the direct involvement of Saudi Arabia and its allies in Yemen has raised the potential for a broader regional conflict with Iran, which backs the Houthi rebels, and that movements of oil through the Bab el-Mandeb Strait could be disrupted. We are not political analysts, but we suspect that the worst of these fears are overdone," Pugh said.
He believes that Iran would want to get embroiled in a direct conflict with Saudi Arabia and its Gulf allies at a time when it is edging closer to a nuclear agreement with the West.
Moreover, economist stressed that Yemen is a small oil producer - it currently pumps around 125,000 barrels a day down from around 300,000 in 2010.
"Meanwhile, Saudi Arabia's oil facilities are located in the east of the country far removed from where the conflict is taking place. Similarly, Oman's oil fields are a comfortable distance away from its border with Yemen," analyst said.
He mentioned that admittedly, the threat of disruptions to oil shipments that pass through the Bab el-Mandeb Strait, located between Yemen and Djibouti is more serious and added that around 3.8 million barrels per day of oil and products passes through the straits.
"We suspect these fears can largely explain the jump in oil prices over the past day or so. We would not dismiss this threat entirely, particularly if the air strikes fail to halt the Houthi's advance southwards. But it's worth bearing in mind that Somali pirates have been operating in these waters for many years and, as a result, oil tankers are now heavily guarded," Pugh said.
"Even if fighting did progress south and make it too dangerous for ships to traverse the Bab el-Mandeb Strait, oil transporters could simply make the longer journey around Africa. This would add around $3 -$4 per barrel onto transport costs and add about 10 days extra onto a typical journey from the Middle East to Northern Europe", economist added.
Oil prices may remain elevated for the next few weeks as tensions remain high, but unless fighting reaches the Bab el-Mandeb Strait, prices are likely to remain weak, according to the economist.
Oil prices have started to drop since July 2014 when they fell from $105 to $100 and then to $80 per barrel. After OPEC member states refused to reduce the quota for oil production in November, the decrease in oil prices accelerated. The average price for oil has varied within $50 per barrel since early 2015.
During electronic trading on the New York Mercantile Exchange on March 27, the West Texas Intermediate (WTI) for May 15 delivery decreased by $2.56 to $48.87 a barrel.
Brent crude (which is the benchmark price for products in Europe and Asia) for May 15 delivery decreased by $2.78 to $56.41 a barrel on the London-based ICE Futures Europe exchange.
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Aygun Badalova is Trend Agency's staff journalist, follow her on Twitter: @AygunBadalova
