Oil prices surge after Saudi air strikes in Yemen

[SINGAPORE] Brent crude oil shot up nearly 6 per cent on Thursday after Saudi Arabia and its Gulf Arab allies began a military operation in Yemen, but the benchmark later came off its high near US$60 as importers saw no immediate threat to supplies.

The strike against Houthi rebels, who have driven the president from Yemen's capital Sanaa, could stoke concerns about the security of oil shipments from the Middle East.

Oil prices jumped as traders and importers said they were worried the Saudi attack was a sign that fighting in the oil-rich Middle East was spreading and out of control.

Brent futures rose as high as US$59.71 a barrel, up almost 6 per cent since their last settlement, before dipping back to US$58.09 a barrel at 0504 GMT, up US$1.61.

US crude was up US$1.83 at US$51.04 a barrel.

The risk from the attack in Yemen was heightened because the Houthis have received some support from Iran, Saudi Arabia's long-time rival for dominance in the Middle East. "The Saudis have taken military action because they have said the Houthis are getting support from the Iranians," said Li Guofu, director of the Centre for Middle East Studies at the China Institute of International Studies. "This is an indication that the war may gradually spread into a regional conflict. This is something the Chinese government is very much concerned about," he said.

Beyond oil, the Middle East is also the world's biggest exporter of liquefied natural gas (LNG) via Qatar and Yemen, but importers said they were not immediately worried. "Gas supply from Yemen has no disruption so far. We are not concerned given the supply surplus and weak demand currently,"said Lee Sang-wook, spokesman at state-run Korea Gas Corp.

Like oil, LNG prices have fallen by more than half in the last 10 months as surging output has been met with slowing economic growth, especially in Asia.

Still, with the global crude glut built up from US shale oil and strong output from producers such as Russia, there is little immediate worry about any shortages developing. "Just because Saudi and others conducted air strikes doesn't mean the oil market becomes suddenly tight," said Masaki Suematsu, manager of the energy team at brokerage Newedge Japan in Tokyo, although he cautioned that the conflict could spiral further beyond the airstrikes.

Asian officials also said the fighting occurred near the Red Sea, waters that Arab Gulf supplies do not pass on their way to Asia. European importers may be more concerned as 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, at less than 40 kms (25 miles) wide, are considered a "chokepoint" to global oil supplies by the US Energy Information Administration and the region is heavily militarized by western navies.

(REUTERS