Investing.com -- Crude Oil futures soared on Thursday, as fighting escalated between Saudi Arabia and Shiite-backed Houthi rebels in Yemen near one of the world's largest chokepoints of oil.
Oil prices rose more than 5% on both international and U.S. domestic markets before falling slightly back in afternoon trading. Saudi Arabia, which maintains the world's largest crude oil production capacity, launched a series of airstrikes against rebels positioned inside Yemen early Thursday morning. The bombings came in response to an advance by Houthi rebels toward the city of Aden on Wednesday that forced Yemen president Abed Rabbo Mansour Hadi to flee the port city on boat.
Earlier on Thursday, officials from the Saudi Arabian government said they launched an operation nicknamed Decisive Storm "in order to defend legitimate government in Yemen and to prevent the Houthi militias from controlling the country by force." Oil traders are sensitive to risky geopolitical news involving Saudi Arabia, which has 16% of the world's oil reserves.
On the Intercontinental Exchange (ICE), brent crude for May delivery rose 5.22% or 2.95 to 59.43 a barrel in morning trading, before settling at 59.09 (up 4.62%) at Thursday's close. The large spike in oil futures reflected the instability in the Middle East, as international prices rose slightly higher than their U.S. counterpart.
On the New York Mercantile Exchange, WTI crude for May delivery increased nearly three dollars a barrel to $52.48, before falling back slightly to 51.35 (up 4.35%) in U.S. afternoon trading. Oil prices remained relatively steady in afternoon hours, in spite of reports from the Associated Press that Egypt and Saudi Arabia are ready to mount a ground attack against the Houthi militants once the rebels become sufficiently weakened by the airstrikes.
Yemen is strategically located on the Bab el-Mandab, a strait that connects the Gulf of Aden with the Red Sea. In mid-November, the Energy Information Administration (EIA) ranked the Bab el-Mandab the fourth-largest chokepoint in the world for global oil transport (3.8 million barrels per day). The strait, which is only 18 miles wide at its narrowest point, separates Djibouti from Yemen at the tip of the Gulf of Aden.
A host of oil-rich producers including Egypt, Saudi Arabia and Qatar operate a pipeline that carries oil from the Mediterranean Sea and Suez Canal through Alexandria to the northernmost point of the Red Sea. Further south, the Saudi East-West pipeline transports oil across the country from the Red Sea to the Persian Gulf. A third pipeline, the Sudan oil pipeline, brings oil south into Africa through the Sudanese capital of Khartoum.
The closure of Bab el-Mandab strait would limit tankers from entering the Gulf of Aden before reaching the Arabian Sea – a pathway for global oil transport. While it has been speculated that the Shiite majority in Iran could support the Houthi rebels to gain a foothold on oil in the region, Iranian leaders condemned the advance on Thursday.
The fighting in Yemen has shifted the focus of traders away from a weakening dollar that had caused prices to surge in recent days. The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, rose 0.57% to 97.64. The index had moved above 100 before relatively dovish comments from Federal Reserve chair Janet Yellen last week were thought to have caused the dollar's retreat.