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Futures Tumble As Yemen War Starts; Oil, Gold Surges
by Tyler Durden, Zero Hedge.com:
In a somewhat surprising turn of events, this morning’s futures reaction to last night’s shocking start of a completely unexpected Yemen proxy war, which has seen an alliance of Gulf State launch an air, and soon land, war against Yemen’s Houthi rebels, is what one would expect: down, and down big.
This is surprising, because on previous occasions one would expect the NY Fed, or its pet hedge fund, Citadel, or the BOJ or ECB (via the CME’s central bank liquidity program) to aggressively buy ES to prevent a slide, something has changed, and for the BTFDers, that something may be very fatal with the e-Mini rapidly approaching a 1-handle yet again.
The offset to tumbling stocks, as previously observed, is oil, with WTI soaring over 6% in a delayed algo response to the Qatar headlines.
“Rising prices could become a self-fulfilling prophecy if market participants see this as the beginning of a rally and start buying,” says Global Risk Management oil risk manager Michael Poulsen. “We are already seeing some reaction, as buyers start looking for protection from more costly oil.”
It wasn’t just oil: gold also soared briefly after European traders arrived in the office, but since then the BIS gold trading desk headed by Benoit Gilson has managed to get things mostly back in order.
Why is tiny Yemen, which produced just about 133,000 barrels a day of oil in 2013, making it the 39th biggest producer, according to the U.S. Energy Information Administration, roiling the market? Bloomberg has a quick explainer:
While Yemen contributes less than 0.2 percent of global oil output, its location puts it near the center of world energy trade. The nation shares a border with Saudi Arabia, the world’s biggest crude exporter, and sits on one side of a shipping chokepoint used by crude tankers heading West from the Persian Gulf. Global oil prices jumped more than 5 percent on Thursday after regional powers began bombing rebel targets in the country that produced less than Denmark in 2013.
“While thousands of barrels of oil from Yemen will not be noticed, millions from Saudi Arabia will matter,” said John Vautrain, who has more than 30 years’ experience in the energy industry and is the head of Vautrain & Co., a consultant in Singapore. “Saudi Arabia has been concerned about unrest spreading from Yemen.”
Shipping Chokepoint
Brent, the benchmark grade for more than half the world’s crude, gained as much as $3.30, or 5.8 percent, to $59.78 a barrel in electronic trading on the London-based ICE Futures Europe exchange on Thursday. West Texas Intermediate futures, the U.S. marker, jumped as much as 6.6 percent to $52.48 on the New York Mercantile Exchange.
“Yemen is not an oil producer of great significance but it is located geographically and politically in a very important part of the Middle East,” said Ric Spooner, a chief strategist at CMC Markets in Sydney.
The Bab el-Mandeb strait is the fourth-biggest shipping chokepoint in the world by volume, and is 18 miles wide at its narrowest point, according to the EIA. It’s located between Yemen, Djibouti, and Eritrea, and connects the Red Sea with the Gulf of Aden and the Arabian Sea.
Transport Threat
In 2013, 3.8 million barrels a day of oil and petroleum products flowed through Bab el-Mandeb, EIA data shows. More than half of the shipments moved to the Suez Canal and SUMED Pipeline, which serve as the link between Egypt’s ports of Ain Sukhna on the Red Sea and Sidi Kerir on the Mediterranean.
Closure of the waterway may keep tankers from the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, diverting them around the southern tip of Africa, adding to transit time and cost, according to the EIA. Ships carrying oil from Europe and North Africa won’t be able to take the most direct route to Asian markets if Bab el-Mandeb is shut, the EIA said on its website.
“As the situation in Yemen has dramatically escalated, it’s seen primarily as a threat to international shipping and oil transport,” Theodore Karasik, an independent geopolitical analyst, said from Dubai. “There’s concern that the more ungovernable Yemen becomes, the more it could become a base for piracy in the Red Sea area.”
Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Kuwait responded to a request from Yemen’s President Abdurabuh Mansur Hadi, according to a statement carried by the official Saudi Press Agency.
Proxy War
Saudi Arabia led OPEC’s decision in November to resist calls to reduce its output target of 30 million barrels a day, a resolution that Iranian Oil Minister Bijan Namdar Zanganeh said was “not in line with what we wanted.”
OPEC’s decision and an expanding U.S. supply glut have driven global benchmark oil prices to a six-year low.
“In the longer term, Iran will be happy to disrupt oil supplies,” Vautrain said. “They literally want to control Saudi Arabia and Iraq. They would love that. They’re fighting a proxy war and they will continue to fight a proxy war.” The Houthis, who follow the Zaydi branch of Shiite Islam, say they operate independently of Iran and represent only their group’s interests.
