Saudi-Houthi Truce In Yemen To Add To Downward Momentum On Oil

Key Highlights

• The Saudi-Houthi truce in Yemen adds to downward momentum in oil.
• It eases market tensions over further attacks on Saudi oil facilities.
• It augurs well for the signing of a new ‘nuclear deal’ with Iran.
• It brings the prospect of the resumption of oil supplies from Yemen itself.

There are three key reasons why news that the Houthis in Yemen have signed a truce with Saudi Arabia is much more significant for crude oil prices than many people might think.

First, in the short term, it minimises the chances of a sustained campaign of attacks on major Saudi Arabian oil facilities following on from recent missile and drone attacks on Jeddah and Riyadh, plus subsequent attacks on Saudi Aramco installations in Jizan, Najran, Ras Tanura and Rabigh.

Although Saudi Arabia is not the number one crude oil producer or crude oil reserves holder in the world, the prospect of losing a significant part of its production for an extended period had lent support to oil prices since the attacks.

The Real Deal Is Between Saudi Arabia And Iran

Second, in the medium term, the fact that the ceasefire deal is in reality not a deal just between Saudi Arabia and the Houthis of Yemen but rather also between Saudi Arabia and the Houthis’ principal sponsor – Iran – augurs well for the prospects of a new Joint Comprehensive Plan of Action (JCPOA, ‘nuclear deal’) being announced soon.

The relationship between the U.S. and Saudi Arabia has never been as close as it was before the Saudi-instigated 2014-2016 Oil Price War that aimed to destroy or at least severely disable the then-nascent U.S. shale oil sector. However, with an eye particularly on Israel, Washington has made it clear to Iran that a new nuclear deal will not be signed if there are ongoing aggressive actions in play by Iran against other major powers in the region.

Oil Industry In Yemen Can Be Resuscitated

Third, in the long term, Yemen itself was once a significant oil producer and plans have been in place for some time to resuscitate its crude oil production. Before 2015, when nearly all production in Yemen’s oil and natural gas fields was shut in, the country’s total petroleum and other liquids production averaged around 125,000 barrels per day, according to the EIA.

In April 2018, Austria’s main hydrocarbons player, OMV, re-opened its oil production wells in the Shabwa province in southern Yemen, followed in July by the first export cargo – of 500,000 barrels – in July, to China. Around a year after that the US Senate approved a resolution to end Washington’s support for the Saudi Arabia-led military campaign in Yemen.