N Janardhan
The price of oil climbed around 15 per cent in April – touching a high of $65 a barrel on 16th April, before reducing to $61.5 on 22nd April, compared to $45 in January. Saudi Arabia’s suspension of air strikes in Yemen this week may calm the markets further.
The fluctuations over the last month occurred due to three significant events – the Saudi-led coalition air attacks against Al Houthis in Yemen; the framework nuclear agreement between Iran and six world powers; and Saudi Arabia raising prices for all crude grades it will sell to Asia in May.
The early April jump was a result of the oil markets reconfiguring two factors – the duration of time before Iran might be able to increase exports after the diplomatic breakthrough; and, possible slowing of months-long rise in US crude inventories. In the first case, initial expectations of a quick recovery in Iran’s oil exports were moderated by sentiments that it could take much longer than expected – between four months and a year after a final deal is signed – to lift sanctions.
Oil futures also climbed more than $1 a barrel after Saudi Arabia raised its prices for all crude sales to Asia for the second month, indicating growing demand in the region.
Nevertheless, it was the concerns over the conflict in Yemen that first triggered the oil price speculation during late March. A small amount of pressure on any oil transit chokepoint means a big squeeze in the futures market. So, after months of downturn in oil prices, the events in Yemen gave oil traders the first chance to do what they famously do – speculate. This hiked oil between five and eight per cent.
Even before the Saudi-led countries launched ‘Operation Storm of Resolve’ during March-end, the risks of Yemen’s civil war spreading had kept the oil markets awake. While military action hiked the oil price, politics stabilised it after feelers about Iran’s imminent agreement. Overall, the political and military events in West Asia ruled over the global economic and oil dynamics.
Initial spike in oil prices was conditioned by the first round of territorial gains by the Al Houthis in Yemen, followed by the Saudi-led airstrikes. The regional coalition’s successful efforts to limit the Iran-affiliated-Shiite faction’s advance calmed the oil market. Since it is still unclear how the Saudi-announced ‘Operation Restoring Hope’ would play out, the last word on how the oil market will react is yet to be heard.
Overall, oil prices spiked because of two factors – one, fear that any conflict would lead to reduced oil supply, resulting in higher cost; and two, market forces betting on prices remaining low throughout the year. In the second case, the conflict forced them initially to change their positions in a hurry, before correction. In the former case, markets relaxed after realisation that irrespective of the conflict, it had excess supply and US crude stocks were at record highs.
Saudi Arabia’s direct intervention to counter the Al Houthis came after it felt that its core interests, including the security of the Bab Al Mandeb Strait at the southern end of the Red Sea, was under threat, following the rebel group’s political gains in Sanaa, which extended to Aden. Saudi Arabia also approached the Al Houthis crisis proactively fearing that a non-military response would encourage the Yemeni rebels to get adventurous and attempt incursions across the Saudi border. Though the Saudis stopped the airstrikes claiming its ‘military’ objectives had been met, it was under international pressure to halt the strikes because of civilian casualties.
Since its political objective of reinstating Riyadh-based Abd Rabbuh Mansur Hadi as president of Yemen remains unfulfilled, Riyadh may now pursue a different sort of military intervention – backing militias opposing the Al Houthis, who are aligned with former president Ali Abdullah Saleh. In the past, Iran had threatened to block the other chokepoint in the region – the Strait of Hormuz, through which 15 per cent of the world oil flows – if it was attacked. Saudi Arabia did not want Al Houthis to use the same threat vis-a-vis Bab Al Mandeb.
Though Yemen has oil and gas resources, it exports are minimal. But the oil market reacts not only to the situation on the ground but on the basis of worst-case scenario forecasts. As a result, it factored the possible impact on the oil market if the flow of oil through the Bab Al Mandeb Strait was affected.
