Update: Oil prices surge after Saudi air strikes in Yemen

[LONDON] Brent crude surged by as more than 5 per cent on Thursday after Saudi Arabia and its Gulf Arab allies began air strikes in Yemen, before paring gains by almost half to trade back near US$58 a barrel.

The military operation against Houthi rebels, who have driven the president from Yemen's capital Sanaa, has not disrupted oil facilities of major Gulf producers.

But fears that the conflict could spread stoked concerns about the security of Middle East oil shipments. Saudi Arabia's rival Iran, which backs the Houthi militia group, denounced the assault.

Brent futures were up US$1.69 at US$58.17 by 1431 GMT, off an earlier high of US$59.78. US crude was up US$1.12 at US$50.33 a barrel, after reaching US$52.48 earlier in the session when both contracts gained around 6 per cent.

"This conflict is about Saudi concerns over having an Iranian ally in its backyard," Jordan Perry, senior analyst at risk consultancy Verisk Maplecroft, told the Reuters Global Oil Forum.

"The surge we've seen in prices over the last 24 hours or so has been a bit of an overreaction ... (but) the Houthi takeover in Yemen does have significant geopolitical repercussions in that it adds to Iran's growing regional clout."

Kuwait, a member of Opec that supported the strikes, said it had raised security around its oil facilities after the military operation in Yemen.

While Yemen is only a small producer whose output has been disrupted for months, Arab producers have to ship oil past its coastline via the Gulf of Aden to get to the Suez Canal, a key passageway to Europe.

The waters between Yemen and Djibouti, known as Bab el-Mandeb, are less than 40 km (25 miles) wide. They are considered a "chokepoint" to global oil supplies by the US Energy Information Administration (EIA), which estimated 3.8 million barrels a day passed through Bab el-Mandeb in 2013.

Four Egyptian naval vessels have passed through the Suez Canal en route to Yemen to help secure sea lanes, maritime sources said.

Oil prices pared gains after the dollar strengthened in the wake of strong employment data, having earlier hit its lowest against the euro in three weeks. Dollar-priced commodities tend to move inversely to the US currency.

Traders said the initial spike in oil may have been exaggerated by funds closing out bets that prices would fall amid ample global supplies. Data last week showed money managers had amassed the largest number of US crude short positions on record.

REUTERS