Oil prices are surging despite worries that the world is running out of places to store abundant crude oil supplies. The recent surge is sparked by escalating tensions in Yemen; a Saudi-led coalition started bombing targets in the country as teeters on the brink of a civil war. This escalation of tensions sent U.S. benchmark WTI oil prices up more than 4% to more than $51 per barrel, while globally benchmarked Brent crude touched $59 a barrel.
What's happening now
Violence in Yemen has been escalating as Shiite-linked Houthi militants in the country seized control of the capital. This forced Western-backed President Abed Rabbo Mansour Hadi to flee by boat to the port of Aden. As militants drew closer to that southern city he was forced to escape again, this time with the help of a convoy of Saudi Arabian diplomatic officials. As the situation continues to escalate there is a risk the country could dissolve into civil war, much like what's happened recently in Iraq and Syria.
To prevent the Houthi from taking over the country, Saudi Arabia and allies from the Persian Gulf region launched airstrikes against the rebels and threatened to send in ground troops. One of the reasons why Saudi Arabia and its allies are getting involved in the conflict is that they are predominantly Sunni Muslim, and want to prevent Yemen from joining Iran as another Shiite-dominated state in the region.
Yemen and oil
The other issue of concern for Saudi Arabia is the role Yemen could play in the oil market. While Yemen contributes less than 0.2% of global oil output, it plays a potentially important role in the shipment of oil. That's because it sits on one side of the key Bab el-Mandab Strait, which is one of the world's seven key oil chokepoints as it serves as a passageway for global oil shipments.
Each day upwards of 3.8 million barrels of oil and refined petroleum products flow through this narrow strait. This oil is destined for the U.S., Europe and Asia. Closure of this strait could keep oil tankers originating in the Persian Gulf from reaching the Suez Canal and the key SUMED pipeline in Egypt. Meanwhile, oil also flows out the other end of the Red Sea to Asian markets. The concern is that a Shiite-controlled Yemen could put pressure on its regional rivals by closing the strait and forcing oil shippers to go around the Cape of Good Hope on the southern tip of South Africa. This would add time and cost, causing a major disruption of global crude oil supplies.
The other concern is that a Shiite-backed Yemen could team up with Iran to send a message to the world by closing both the Bab el-Mandeb and the Strait of Hormuz at the same time. The Strait of Hormuz is by far the world's most important oil chokepoint, as 17 million barrels of oil per day flow through that narrow strait between Iran and Oman. Such a disruption would impact well over 30% of the world's seaborne-traded oil and could send the price of oil surging to upwards of $200 a barrel by some estimates.
After a long period of relative calm the Middle East is escalating to the brink of war. Because so much of the world's oil supplies flow out of that region, this escalating tension is sending oil prices higher as worries of a major disruption in oil supplies starts to grow. What this shows is that the current glut of oil on the market could quickly evaporate if tensions in the region boiled over.