Brent crude rises amid supply fears
BRENT crude oil pared early gains but still rose more than 4 per cent towards US$59 a barrel yesterday, after Saudi Arabia and its Gulf Arab allies began a military operation in Yemen.
The air strikes against Houthi rebels, who have driven the President from Yemen's capital, Sanaa, could stoke concerns over the security of Middle East oil shipments.
Brent futures were up US$2.27 at US$58.75 by 10.34am GMT. United States crude was up US$2.03 at US$51.24 a barrel. Brent and US crude prices spiked around 6 per cent earlier in the session but pared gains in European trading.
"Geopolitical risk like this has been on the back burner for a while, because we've been focusing on global oversupply," said Ole Hansen, head of commodity strategy at Saxo Bank.
"This news has not made the oversupply go away. The upside potential is limited unless something escalates. We need to see how this unfolds over the next couple of days," he said.
The risk from the attack in Yemen was heightened because the Shi'ite Houthis have received some support from Iran, Saudi Arabia's long-time rival for dominance in the Middle East.
The Iranian Foreign Ministry demanded an immediate halt to all military "aggressions" in Yemen, the semi-official Fars news agency reported. A ground offensive may be needed to restore order in Yemen, said a Saudi source familiar with defence matters.
In order to export to Europe, Arab producers have to ship oil past Yemen's coastlines via the Gulf of Aden to get to the Suez Canal.
The waters between Yemen and Djibouti, known as Bab el-Mandeb, are less than 40km wide. They are considered a "chokepoint" to global oil supplies by the US Energy Information Administration.
The region is heavily populated with Western military forces. The United States and France operate large military bases in Djibouti. Nato's anti-piracy fleet also operates from the Gulf of Aden.
China's Foreign Ministry said it was deeply concerned over the worsening situation in Yemen.
However, some analysts said the strikes could lead to more stability in the region, if they resolved the conflict in Yemen. "If this is a prelude to a bigger operation in the Middle East, that may lead to some stability in the region," said Mari Iwashita, chief market economist at Tokyo's SMBC Friend Securities.