Uptick in Yemen Conflict Sends Crude Higher

Market Trends - 05/05/2015

After managing to avoid the spotlight by denying a ground presence in Yemen, Saudi Arabia has stepped up its campaign to root out the Houthi presence in its southern neighbour after rebel forces began shelling the Saudi border city of Najran. With hostilities crossing the border, this reflects a dramatic shift in the conflict from what was once an isolated uprising to full scale confrontation as small skirmishes approach an intensifying face-off between forces. So far, many casualties have been reported on the Saudi side, paving the way for the National Guard to begin operations on the ground after recent accounts of Saudi military advisors helping loyalists retake the airport in Aden. The Saudi response is unlikely to be muted especially after an attack on the nation’s sovereignty, highlighted the restraint exercised up until this point. The main reaction has been felt in oil prices, with West Texas Intermediate pricing at 5-month highs.

Energy prices have been steadily on the uptick in recent weeks, with oil prices rebounding over 40% since hitting March lows. Although the descent in prices might have been overdone due to speculative positioning, the latest rally continues unabated despite production levels near multi-year or multi-decade highs in certain cases. For shale producers, the latest gains have meant a breath of fresh air, especially for companies crumbling under the weight of high breakeven costs. While not expected to reverse the decline in the drill rig count, it will likely see US production levels rise as company’s eager to see fortunes reverse raise output. However, despite the buoyance in prices, there are looming factors that might pop the latest bubble of optimism just as prices hit fresh 5-month highs. Any nuclear deal that arises between Western Powers and Iran is likely to see an additional few million barrels of production hit open markets, hurting the chances of a longer-term recovery in prices.


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