Oil Prices Spike As Bombs Fall

Written By Brian Hicks

Posted March 26, 2015

The Middle East Is Blowing Up

As our own Christian DeHaemer knows, crises and opportunities go hand in hand and Saudi Arabia’s air strikes in Yemen epitomize just that.

At the behest of Yemen’s president, a Saudi-led Sunni-Muslim coalition of 10 Middle Eastern nations began bombing Shiite-Muslim rebels in Yemen.

As all oil investors know, when the targeted region of any attack is at or near the center of global energy trades, you’re guaranteed to see higher oil prices.

Together the 10 countries that make up a Sunni alliance capable of producing approximately 21 million barrels of oil a day, as of this past October, account for about 22% of global supply.

Since the air strikes started, Brent Crude has climbed nearly 6% and West Texas Intermediate (WTI) has seen a one-month high.

While Yemen itself is only responsible for a relatively small amount of oil when considered against the total market, 0.2%, 3.8 million barrels of crude oil and other oil products pass through Bab el-Mandeb a day, making it the fourth-biggest shipping chokepoint in the world and the cause of this market disruption.

Closing the two-mile Bab el-Mandeb strait would force oil tankers to sail around the southern tip of Africa to reach European, North American, and South American markets, which would kick up prices even further.

If this conflict is a sign of things to come in terms of Sunni and Shia relations in the Middle East, you can expect prices in the region to continue rising as well as ripple through the rest of the global market.

Status Quo

Oil futures of Brent rose to $59.78 a barrel and WTI rose to $52.48 a barrel. Trade volume for both commodities was 62% over the average of the past 100 days.

All told, prices took on about 15% in the week, resulting in an increase in supply in Cushing, Oklahoma, a shale oil hotspot which is already dangerously near capacity.

While prices are still down around 50% from 2014’s peak before the eight-month rout caused by OPEC refusing to cut production and the U.S. allowing supply to reach its highest amount in over three decades, this pricing adjustment won’t go unnoticed.

Take Oasis Petroleum Inc. (NYSE: OAS) for instance. While it was the victim of a nasty reversal the other day, its share price was 6% higher this morning as a direct result of after-hours trading. Now it’s sitting above that, at $14.15, an OAS high for the month.

As the threat of a potential all-out war in the Middle East looms over the region, count on oil prices continuing to spike.

Shortly after we bought OAS, the stock immediately ramped. We expect it to go higher, so we’re going to hang onto it for now.

My colleague, Briton Ryle, has been following the stock for some time as part of his letter, Real Income Trader. Click the jump and read all about it.

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