Saudi Arabia and its allies recently launched airstrikes against Shiite Houthi rebels in Yemen. While the political fallout from this military attack may be a bit unclear, the economic impact (at least in the short term) is quite evident.
There’s no doubt that actions in the Middle East can cause major changes to oil prices, and that much is obvious based on the events of the past few days.
So what is the immediate affect on oil prices, how can we tell what will happen in the longer term, and how should you react?
Figuring out the immediate impact these military operations in Yemen are having is easy…Oil prices have surged roughly 6% since the attacks.
Unease in that important oil region has caused concerns about energy shortages, and basic economics has pushed the price upward quickly.
The more difficult outcome to predict is the longer-term one…
We can’t know if there will be more military actions, how damaging those potential actions would be, how long they could last, or any of that information. But we can look at the landscape involving Yemen and study the facts.
Although Yemen itself isn’t a major producer, it does own plenty of very important shoreline. That shoreline overlooks the Strait of Bab el-Mandab, which connects the Red Sea with the Arabian Sea through the Gulf of Aden.
Large amounts of Saudi oil help make up the more than 3 million barrels of oil that are transported along Yemen’s waterways every day.
And that’s precisely why uncertainty in Yemen directly correlates to uncertainty for oil prices. It’s an epicenter for oil transit.
So how should you react?
Well, with Yemen proving to be a big catalyst for the price of oil, a continued and/or intensified disruption in that area would likely allow this price surge to continue.
At this point, the basic principles of supply and demand are at work. An initial scare won’t sustain price leaps, but more unrest might.
Just remember, the overall sentiment on oil is very much down. Don’t let a small piece of the puzzle fool you if it can’t be perpetuated.