(Bloomberg) -- Oil climbed to a three-week high as Saudi Arabia and its allies bombed rebel targets in Yemen, which is near the center of global energy trade.
Brent surged 4.8 percent and West Texas Intermediate climbed for a fifth day. Saudi Arabia led a coalition of 10 Sunni-ruled nations in airstrikes against Shiite Houthi positions after an appeal from Yemen’s President Abdurabuh Mansur Hadi. The 10 countries produced about 21 million barrels of oil a day in October, or 22 percent of global supplies, according to Energy Information Administration data.
Yemen is located on Bab el-Mandeb, the fourth-biggest shipping chokepoint in the world by volume, according to the EIA. Oil prices are still down about 50 percent from last year’s peak as the Organization of Petroleum Exporting Countries failed to cut production and as U.S. supplies increased to the highest in more than three decades.
“When you get people bombing in the part of the world that’s really critical to energy, it makes sense that there will be some concern,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion. “But I don’t think it will be long-lasting. It’s really hard to make a bullish case with such a kind of supply overhang.”
Brent, WTI
Brent for May settlement climbed $2.71 to $59.19 a barrel on the London-based ICE Futures Europe exchange, the highest close since March 6. The European benchmark crude was at a premium of $7.76 to WTI.
WTI for May delivery gained $2.22 to $51.43 a barrel on the New York Mercantile Exchange, the highest since March 4. The five-day winning streak is the longest since February 2014. The volume of all futures traded was 36 percent above the 100-day average for the time of day. Prices gained about 17 percent since March 19 as the dollar weakened.
A total of 3.8 million barrels a day of crude and oil products passed through Bab el-Mandeb in 2013, the EIA estimates. Yemen contributes less than 0.2 percent of global oil output, making it the world’s 39th-largest producer, according to the Energy Department’s statistical arm.
‘Correct Downwards’
“The Saudi airstrikes and the fears the conflict will spill over into Saudi territory are driving prices for now,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd., said by e-mail from London. “As there’s really no risk of Saudi supplies being impacted, the rise is overdone and we expect it to correct downwards.”
Yemen’s government collapsed in the face of an offensive by Houthis. Saudi Arabia, the biggest OPEC producer and the Gulf’s main Sunni Muslim power says the Houthis are tools of its Shiite rival Iran, another OPEC member, and has vowed to do what’s necessary to halt their advance.
“Yemen to some extent is a bit of a proxy war between Iran and Saudi Arabia, but in reality, Iran doesn’t have a whole lot of influence there,” O’Grady said.
Closing the 2 mile (3.2 kilometer) Bab el-Mandeb strait that links the Gulf of Aden and the Red Sea would force tankers to sail around the southern tip of Africa to reach European, North American and South American markets.
Airstrikes
Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Kuwait responded to a request from Yemen’s president, according to a statement carried by the official Saudi Press Agency. Egypt, Pakistan, Jordan, Morocco and Sudan are also part of the operation, according to Al Arabiya TV, bringing the total number of aircraft involved to 185. The airstrikes on Sana’a, the capital, came after forces loyal to the Houthi rebels marched on the southern port city of Aden.
“Whenever the words war and Arabia Peninsula are together, you are going to see higher oil prices,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “After a few days of inconclusive fighting you’ll see the markets settle down.”
U.S. President Barack Obama has “authorized the provision of logistical and intelligence support” for the operation, the White House said in a statement.
Saudi Arabia produced 9.85 million barrels a day in February, according to data compiled by Bloomberg. Iran is the fifth-largest OPEC producer with output of 2.78 million a day.
U.S. crude inventories and production swelled last week to the highest levels in more than three decades. Crude stockpiles increased by 8.2 million barrels to 466.7 million through March 20, the highest level in weekly EIA records dating back to August 1982. Production accelerated to 9.42 million barrels a day, the fastest pace since at least January 1983.
To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Moming Zhou in New York at mzhou29@bloomberg.net
To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Stephen Cunningham, Charlotte Porter
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