Oil prices breached the $50 mark on Thursday as Saudi Arabia and other Gulf states deployed airstrikes into Yemen in defense of the Sunni leadership and against the Shiite Houthi rebels. While oil has moved upwards rapidly after retesting old lows in the low 40's last week, this latest 4% move in oil is counterintuitive and needs to be sold.
Oil has been laboring under very deep stockpile gluts and projections from virtually every American E+P that production is not yet ready to decrease. With surpluses of more than 30 days here in the US, we've reached historic records on storage. Yet storage levels, as important a fundamental as they are, are hardly alone in determining the price for a barrel of oil. In the last week, the dollar finally took a break from its one-way drive to parity with the Euro, allowing oil to recover quickly after testing the January $43 low.
And throughout this downturn in oil, geopolitical events have been mostly ignored. It used to be that a good dustup in the civil war that continues in Libya would translate into at least a $3-$5 rally in the price of crude. But in February, when supplies again collapsed in Libya, the market seemingly didn't care.
But it can't be equally dismissive about military action in Yemen. The 'success' of Houthi rebels in destabilizing Yemen, along with a brutal suicide attack on a mosque in Sanaa killing 137 on March 20 has motivated the Saudis to strike back with air raids inside Yemen. Sunni leaders inside Saudi Arabia, and in other key Gulf states, are also striking directly against Iran, the supporters of Houthi rebels, and protecting the sovereignty of Sunni-controlled regions against the Shiite inroads being made in Iraq and elsewhere in the Middle East. The battle between Shiite and Sunni continues, but the important point is that the Saudis are now frightened enough of an Iranian threat to deploy military force without the aid or consent of the United States.
Oil is reacting to the possibility of further destabilizing military action or a response from the Iranians, both possibilities I think unlikely. The Iranians have already publicly dismissed military action as a possible response, knowing that would almost surely lead to a US showdown.
This action is Saudi in its origin and Saudi in its purpose and in both I think it is ultimately bearish for oil prices. First, the Saudis are reminding the Middle East and the United States that they retain control of the Gulf…