)
Oil markets probably got the boost they were looking for, but not in the way they would have liked. Oil prices jumped nearly 6% after Saudi Arabia and its Gulf allies began a military operation against rebel forces in Yemen.
Any war in an oil producing country is bullish news for the oil markets. But Yemen is not even a major oil producer, with a global rank of 39 in oil production.
Oil prices did not move up despite the problems in Libya, ISIS fighting in oil rich Iraq, and Russia/Ukraine, all much bigger players, but have reacted to the news when a smaller producer has been hit. There is clearly more to the rise in oil prices that the present event. Oil prices reacting in line with the news is a bullish sign for the commodity.
Firstly, the reaction of oil prices to an event suggests a technical bottom has been made. Bets that oil will touch $100 have trebled in the span of one month. Open interest in call options of strike price $100 of 2018 end expiry have touched an equivalent of 2.7 million barrels, nearly treble than what they were at the start of the month.
US oil magnate Boone Pickens said on Tuesday that he expects oil to touch $100 by the end of 2016. Pickens said the idea of "peak oil" – the point in time at which oil production will go into an irreversible decline – shouldn’t be dismissed on account of the increase in US production. Other regions are seeing their output decline, he said.
But this logic is not is sync with the Saudi line of thinking. Mohammed Al Madi, Saudi Arabia’s OPEC governor, said on Sunday that oil is unlikely to rebound to $100 any time soon because higher prices would spur more output and prolong a glut. Crude prices at that level will let the high-cost producers come back again, Madi said at a conference in Riyadh. Saudi Arabia is pumping at a near-record level of about 10 million barrels a day, Oil Minister Ali Al Naimi said.
In reality, oil prices touched a two week high level even before Saudi pilots took off. Oil prices moved higher despite new data showing higher crude oil inventories. Supply and inventory data clearly points to a bearish scenario for crude oil.
But the game changer for oil prices is the US dollar. Oil has been rallying since the Federal Reserve watered down expectations of an early rate increase. Since then, the dollar has started retreating from its historic high which in turn has fueled a rally in oil prices. Oil prices moved in tandem with the dollar, especially in the past four months, analysts said. Dollar-priced commodities like oil become more affordable for holders of other currencies as the dollar depreciates.
As for Yemen, it is not its oil producing capacity which is taking oil prices higher, but its strategic location. Yemen is strategically located on the Bab el-Mandab, a strait that connects the Gulf of Aden with the Red Sea. In mid-November, the Energy Information Administration (EIA) ranked the Bab el-Mandab the fourth-largest ‘chokepoint’ in the world for global oil transport (3.8 million barrels per day).
The waters between Yemen and Djibouti, at less than 40 km (25 miles) wide, are important for trade to Europe and America. The United States and France both operate large military bases in Djibouti, and China also plans to open a base in the strategically well placed but small country in East Africa. NATO's anti-piracy fleet also operates from the Gulf of Aden. Who controls this region will decide the direction oil prices in the near term.
