Yemen and the big oil price move this week.
Saudi Arabia “reportedly” is putting “boots on the ground” in Yemen, and these reports have triggered a big rise in Oil Prices. I use quotes around “reported” because, as of this writing, there has been no official, or otherwise authoritative, confirmation of new, significant troop moves into Yemen. Whether coincidental or otherwise, these reports triggered market-order covering trades in heavily oversold and shorted oil futures markets. Oil prices which had traded below $38 bbl earlier this week, by mid-day had risen to over $45 bbl (barrel) by Friday for West Texas Intermediate (WTI) is the major U.S. market for crude oil, and contracts are for 1000 bbl (equivalent to 42,000 gallons). $45 is the price per bbl of crude oil for these contracts of WTI. Oil contracts are highly leveraged and so moves like this one no doubt would force some margin calls, hence the market orders to buy, exacerbating the price jump. Cynics will note that Saudi Arabia, as the world’s largest oil producer, has been suffering from the low world’s oil prices, and the short-term timing couldn’t be better going into the final week before the Labor Day long weekend when petrol demand is very high.
The choice of words here is important. The only kind of ground involvement that could impair oil supplies would have to be in “significant” numbers that might indicate an expansion in fighting, such as to change the flow of oil from Yemen—possibly even raise the threat of terrorism to oil pipelines in both Saudi Arabia and Yemen. Such moves would also have to be “new” troop incursions in Yemen to justify an oil price jump like this one, as there have been reports all along of smaller Saudi troop incursions into Yemen. You Tube videos, ostensibly supporting the new reports, are vague at best about the numbers, purpose, and location of these “reportedly” new troop incursions. There were previous reports in July and earlier this month of Saudi ground troop incursions in North Yemen. Those were supposed to be of a supportive nature–much as our “advisers” in Iraq are supposed to be. Earlier Saudi moves were justified as “defensive” in terms of preventing Houthi incursions into Saudi Arabia and had no lasting effect on oil prices. So unless these reports indicate some new significant troop incursions it shouldn’t be expected to change oil deliveries.
There have been two targets of “significance” in Yemen: Sana’a in North Yemen, and Aden. Sana’a is the capital and has been under Houthi control. Aden is a port city on the Gulf of Aden, which connects the Red Sea to the Arabian Sea and hence the Persian Gulf. This is a major oil shipping route. Aden had been seized by the Houthis, and they were recently driven out so troops from the Saudi coalition could be for the purpose of securing the Port of Aden. As we wait to see if the Saudi’s confirm the report of new “troops on the ground,” the rumor alone has been enough to produce a 20 percent rise in oil futures–a huge move for such a highly leveraged market–meaning giant profits for speculators who “just happened” to have good market timing. It meant a huge increase in revenue, however temporary, for Saudi Arabia. Just another example of how important geopolitical events–even just rumors of them–can be in influence markets well beyond normal economic analyses. In this case previous rumors of Saudi boots on the ground in Yemen didn’t move the markets as much. In this case it was the convergence of a very oversold oil market that had come down from $60 bbl to 38 with no significant trading rallies in between, and the huge short interest combined with China demand worries that did the trick. But the final straw, what scientists call the “sufficient condition,” that triggered the move was the rumor on Yemen.