Oil dips as Mid East concern eases

27 May 2015, News Wires – Oil prices fell over a percentage point on Friday as traders estimated that the threat of a disruption to world crude supplies from Saudi Arabia-led air strikes in Yemen was low.

Oil price drop.

Oil price drop.

Goldman Sachs said in an overnight note that the strikes in Yemen would have little effect on oil supplies as the country was only a small crude exporter and tankers could avoid passing its waters to reach their ports of destination.

Internationally traded Brent crude futures were trading at $58.44 a barrel in early trade on Friday, down 75 cents from their last settlement. US crude was down 88 cents at $50.55 a barrel.

Prices soared as much as 6% the previous day after a Saudi-led coalition of Arab nations began strikes on Shi’ite Houthis and allied army units who have taken over much of Yemen and seek to oust President Abd-Rabbu Mansour Hadi.

“While Yemen is a small producer (145,000 barrels per day in 2014), the price rally is driven by fears of potential escalation and the proximity of the Bab el-Mandeb strait,” Goldman said.

Closure of the strait could affect 3.8 million bpd of crude and product flows, but analysts said tankers could be diverted to travel around Africa instead of passing Yemen.

“At the moment, the fighting is located in the central part of the country around the capital of Sanaa. Even if fighting did progress south and potentially threaten tankers moving through the Bab el-Mandeb Strait, they could simply take the longer route around Africa,” ANZ bank said on Friday.

Analysts also said that the less than 40 kilometre narrow strait between Yemen and Djibouti was heavily militarised by the West, with the US and France both operating bases in Djibouti and NATO and other allies having a fleet presence in the Gulf of Aden to combat piracy.

ANZ said that a bigger impact from the Middle East on oil prices might come from a potential nuclear deal with Iran, which could result in a loosening of western sanctions against Tehran and rising exports of its oil reserves.

“With potentially 30 million barrels stored offshore, it (Iran) could quickly flood an already saturated oil market,” ANZ said.

Goldman and ANZ both noted that any nuclear deal with Iran was unlikely to lead to higher Iranian oil exports before the second half of the year.

“However Brent oil would likely lose its recent risk premium and fall back to the mid-50s,” ANZ said.

– Reuters

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