The price of Brent soared and hit a two-week high yesterday

Crude

The price of Brent soared and hit a two-week high yesterday on news that Saudi-led coalition started air-strikes in neighbouring Yemen. The market was thus reminded that geopolitical risks, which have been largely ignored in recent months, are still present.

Even though Yemen itself is a rather small producer of oil - in 2014, its average production reached 0.13 million barrels per day (bpd) – the news triggered a relatively large market response. The key reason probably is that market worries about a possible disruption of oil flow through the narrow Bab el-Mandeb (about 3.8 mbpd), which is, however, not likely given the pledge of the head of the US forces in the region to keep the route open. The reaction of oil price could also stem from the fact that the latest conflict even increases tensions between (Sunni) Saudi Arabia and (Shia) Iran, both major producers and exporters of oil (this is a long-term issue). The low probability of actual disruption of oil flows is nevertheless confirmed by today’s slide of the oil price back below 58 USD/bbl.

Regarding geopolitical risks, the talks between Iran and the world powers about its nuclear programme present larger risk for the oil price, in our view. If the agreement was reached and the Western sanctions were lifted, the country could increase its oil exports by 1 mbpd. This poses a clear downside risk for oil prices (especially in a situation of already oversupplied market).

We therefore maintain our view that the oil price could decline in weeks and months to come and expect more significant price growth towards the end of this year. The balance of risks is, however, skewed in the direction of longer period of low oil prices.

Chart of the day:

The oil price surged yesterday on news that Saudi-led coalition triggered air strikes in Yemen…