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Why the Crisis in Yemen Could Get Ugly Very Fast

by | published March 26th, 2015

The last 24 hours have provided a stark reminder of the immediate impact geopolitical events can have on oil prices.

This time there’s a crisis in Yemen, and it’s about to take a turn for the worse.

As a result, I’ve been asked to provide my analysis on CNBC’s Closing Bell at 4:10 p.m. today to discuss the impact the crisis will have on oil prices.

But, as always, I wanted to give you a quick heads-up on what I am going to say and the rationale behind it.

This crisis is already having a big impact on the price of crude…

Oil Jumps as Yemen Burns

By mid-morning today, West Texas Intermediate (WTI) was up over 6% in less than 18 hours. Meanwhile Brent was up more than 5%, and was showing signs that it might be accelerating.

Behind this dramatic jump in price is the initiation of air strikes against Houthis rebels in Yemen by Saudi-led coalition forces.

As reported by Saudi-owned Al-Arabiya TV, the coalition includes the UAE, Bahrain, Kuwait, Qatar, Jordan, Morocco, and Sudan sending aircraft, while Egypt, Jordan, Sudan, and Pakistan were ready to take part in any ground offensive. As part of the offensive, the U.S. was providing “logistical and intelligence support.”

Some of these airstrikes are being directed at the Al Anad air base, which was captured by rebels earlier yesterday. Until a few months ago, this was the base the U.S. used to launch counter-terrorism operations in the region, especially against ISIS in Iraq.

But how quickly things have changed since then…

As it stands, the immediate impact on oil trading routes is minimal. Yemen is located at the southwestern tip of the Arabian Peninsula at the entrance to the Red Sea, and a short boat ride from the Horn of Africa (hardly a stable place itself these days).

Given its location, little direct oil traffic moves north from here. The primary Saudi East-West Petroline oil pipeline connects to Yanbu on the coast well north of Yemen. About 5 million barrels a day travel via that route.

As you can see, the Saudis do have an extensive border with Yemen, and they have been moving troops to points along the border over the past few days, leading to speculation that ground forces may be next. The Yemeni port of Aden is currently under siege, and the current president is either in hiding or has already left the country.

Following the Arab Spring two years ago, Abdu Rabbu Mansour Hadi took over the presidency from long-time strongman Ali Abdullah Saleh. Saleh has the support of the Houthis, and they now control most of the country’s military, including the air force.

That makes the U.S. and regional response much more difficult. In fact, the situation has all the hallmarks of a bloodbath just waiting to happen.

Dangerous Times Ahead

This is the fourth country in the area to unravel since the first Arab Spring unfolded – after Syria, Libya, and the ISIS insurgency in Iraq.

But this one is very different and far more deadly. The makeup of the parties involved is the real concern rattling the oil markets, not the direct impact of the crisis on current oil trading routes.

With the exception of events in the tiny country of Bahrain, the first Arab Spring was able to avoid the powder keg issue.

But not this time.

The besieged government in Sana’a, the Yemeni capital, is Sunni. The Houthis are Shiite, and strongly supported by Iran. The airstrikes yesterday have sunk Saudi-Iranian relations to their worst levels in decades.

Tehran has since condemned the attacks as an invasion, and promise all the help necessary to repel it. Ground troops that have amassed on the Saudi side of the border are likely to cross over into Yemen shortly.

As a result, I would not expect any further progress in the 5+1 nuclear talk with Iran from this point forward either.

Unless Iran moves to block the Strait of Hormuz in reprisal to the Saudi strikes, a reaction that would affect 20% of global crude oil exports and immediately bring in the U.S. fleet, oil prices should begin to recede a bit.

But that reprieve may not last very long.

As I have noted several times over the past month, the Arab Spring II will be much nastier than the first round of uprisings, especially if the Sunni-Shiite division becomes a central issue.

Keep in mind that countries in the region essentially bought off the opposition two years ago with massive additions to social welfare programs and government grants. All of them were funded when oil prices were much higher.

They do not have that luxury this time.

Again, be sure to tune into CNBC today at 4:10 to get all of the most current details. This could get ugly fast.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Frank
    March 26th, 2015 at 14:24 | #1

    Excellent evaluation of the Yemen crisis ,Kent and let us hope that the coalition countries get the job done . Keep the USA out of out of it!

  2. Thomas pyle
    March 26th, 2015 at 14:39 | #2

    Very informative

  3. Chales Burton
    March 26th, 2015 at 14:46 | #3

    The U.S. could soon find itself involved in the major first religious war in several hundred years – doubtless on the Saudi or Sunni side. Which means, on the side of ISIS, like it or not. And that would doubtless obligate Shiite Muslims in America to engage in a Holy War against this government. I presume DHS has plans in place to incarcerate all of them, hmm? The Republicans can’t blame Obama, either. He was just following the lead of the Bushes.

  4. Joe
    March 26th, 2015 at 15:16 | #4

    Kent,

    So the US Foreign Policy is to help the Saudis with logistics and air support against Iran (Yemen rebels) in the South (Yemen) while at the same time, fighting with IRAN against ISIS in Iraq all while trying to get Iran to give up their nuclear aspirations by trying to buy their loyalty and lift the sanctions. President Obama doesn’t know his friends from his enemies. What a disaster the US Foreign Policy has become.
    I should send in my paper work for Money Map Project 2A before the crude prices get back to $100+ per barrel.
    Joe

  5. Tim
    March 26th, 2015 at 17:03 | #5

    Charles Burton, Your mistaken position that the immediate problem in Yemen and the future threat of attacks in the U.S. from Islamic terrorists (though Islamic terrorist ‘deniers’ and ‘apologists’ will designate it as simply “work place violence”), is somehow the fault of former President Bush could only be true, if Bush had actually hacked President Obama’s teleprompter for the past 6 years, posted crazy speeches and press briefings that Obama then verbalized and therefore Bush would be responsible for the Obama administrations failed domestic policies (EPA attacks on the domestic energy producers and willful failure to not secure the U.S. border, releasing about 3,100 convicted felony illegal aliens back into the unsuspecting U.S. public – rather than deporting them, etc) and foreign policies (disregarding U.S. and allied military advisors about the pending disaster if a complete withdraw of U.S. security forces from Iraq took place AFTER al Qaeda had been defeated in Iraq, refusal to designate (or even Obama’s removal from the U.S. Gov. list of real terrorist organizations) various other terrorist states and groups (like Iran and ‘Hezbollah’) as “terrorist organizations” which allows radicalized U.S. citizens that travel and join groups like ISIS and then still be allowed to freely travel back to the U.S., etc). The global turmoil and insecurity that drives energy price volatility is good reason for the U.S. to be as energy independent as the U.S. private sector energy market will support, without the contrived and unreasonable EPA regulations & impediments to U.S. natural resource developments, which consequently maintains U.S. energy import dependence and further aids the Obama administrations ‘transfer-of-wealth’ agenda – from America to the 2nd and 3rd world (not coincidentally to mostly socialist, communist or autocratic anti-American states).

  6. Don
    March 26th, 2015 at 19:03 | #6

    Right on Tim! We will all suffer if we have more people like Charles and there in seeing ideologies wake up!
    DON USMC COMB VET

  7. Don
    March 26th, 2015 at 19:04 | #7

    (Insane )

  8. Harilaos Petrakakos
    March 27th, 2015 at 03:47 | #8

    Great analysis and great comments which lead one to believe that yes we do not want peace. We take sides that fight. Fight abd fight again. Why not? With peace there is no poverty.No ups or downs in world affairs. No fear. So…next one please.

  9. mariana
    March 27th, 2015 at 08:17 | #9

    sir, I think if this violence in Yemen is not quelled we will see a major war breakout. I have already booked some profit and exited major 1/3 rd of my stock positions in D street, mumbai.

  10. Homer
    March 27th, 2015 at 16:41 | #10

    Why should the Christian people of the free world, try and take sides with any muslim country. The Muslims have been fighting each other for the last 2000 years and they are not going to stop now. Almost all the others country’s hate the USA, but they will sure take our free gifts, we have the ability to free our selves from depending on any country. The government just wants to flex our power and the problem is we don’t have the power we use to have and if Russia and China get together they have the weapons and men in the military to defeat us. The USA would have to use the big bomb on each of these country’s and we will still lose. It will be a shame if this happens and all because someone in power of this country doesn’t believe in the way the rest of the country believes in.

  11. Doug Scott
    March 28th, 2015 at 00:25 | #11

    Thanks Kent, I was pleased to read your interpretation of Saudi events and direction. I have concentrated my portfolio on oil gas precious metals and railroads. It thrills me that your predictions echo my own inclinations and intel of others I pay attention to.

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