Increasing tensions in Yemen could soon provide a sizable boost to oil prices once again.
Saudi Arabian ground troops entered northern territories in Yemen in a move to counter retaliatory attacks by Yemeni forces on Saudi soil, according to a report dated Thursday from Tehran-based Press TV, which cited comments from a military official.
Richard Hastings, macro strategist at Global Hunter Securities, said the news was likely part of the reason for oil’s price jumped on Friday after soaring Thursday.
“Yemen would be, from a speculative perspective, the trigger for a much bigger conflict between the Gulf leaders with Saudi alignment, and Iran,” said Hastings. “If that were to unfold, then of course $40 oil would be missing at least one zero.”
Yemen produces roughly 130,000 barrels of crude oil a day, but it still has the power the rally oil prices.
It is all about location. It sits at the Bab el-Mandab Strait, a key chokepoint in international shipping—making it important in terms of international energy trade, according to the U.S. Energy Information Administration.
About 3.8 million barrels of oil a day passed through Bab el-Mandeb in 2013, and a closure of the Strait would keep tankers in the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, forcing them around the tip of Africa, the EIA said.
Even if you don’t know anything about geography, it is obvious that a closure would severely disrupt oil transport in the region.
With Saudi Arabia and other Gulf nations having launched airstrikes against rebel forces in Yemen’s capital and across the country, there is potential for a closure of the Strait. That’s on top of the fact that Saudi Arabia, the largest oil producer in the Middle East, has gotten involved.
“Obviously, when you have Saudi Arabia and the Arabian peninsula involved in military operations, the world takes notice,’ said Ken Crawford, a portfolio manager at Argent Capital Management in St. Louis.