Oil watching Fed, Yemen and Nigeria

Fed Flip Flops

Dueling Fed officials and a confusing situation in Yemen is keeping oil prices on the upside. A good jobs report in the aftermath of a lot of Fed speak had the market almost convinced that the Fed's next move might be the removal of stimulus and set the ground work for the normalization of monetary policy. Yet words by New York Fed President William Dudley, a noted dove, seemed to stop that speculation in its tracks and oil, instead of fearing the Fed, just to spite them. Now it comes down to Fed Chairman Ben Bernanke to talk and tell us where we are at. If he hints that stimulus is coming to an end then oil could take a dive. If not, then the market will get a sense of immortality and drive higher and focus on what is going on in the rest of the world.

The US may be dropping its support for Yemen President Ali Abdullah Saleh after his government open fired on protestors. The New York Times reports, "United States, which long supported Yemen's president, even in the face of recent widespread protests, has now quietly shifted positions and has concluded that he is unlikely to bring about the required reforms and must be eased out of office, according to American and Yemeni officials."

This is another reason to worry about oil prices as Yemen, while not a major producer, sits on the straight of Bab el-Mandab according to the Energy Information Agency. "The Strait of Bab el-Mandab is a chokepoint between the horn of Africa and the Middle East, and a strategic link between the Mediterranean Sea and Indian Ocean. It is located between Yemen, Djibouti, and Eritrea, and connects the Red Sea with the Gulf of Aden and the Arabian Sea. Most exports from the Persian Gulf that transit the Suez Canal and SUMED pipeline also pass through the Bab el-Mandab. An estimated 3.2 million bbl/d flowed through this waterway in 2009 (vs. 4 million bbl/d in 2008) toward Europe, the United States, and Asia. The majority of traffic, about 1.8 million bbl/d, moved northbound through the Bab el-Mandab en route to the Suez/SUMED complex. The Bab el-Mandab is 18 miles wide at its narrowest point, making tanker traffic difficult and limited to two 2-mile-wide channels for inbound and outbound shipments. Closure of the Strait could keep tankers from the Persian Gulf from reaching the Suez Canal or Sumed Pipeline around the southern tip of Africa. This would effectively engage spare tanker capacity, and add to transit time and cost. The Strait of Bab el-Mandab could be bypassed via the East-West oil pipeline, which crosses Saudi Arabia with a nameplate capacity of 4.8 million bbl/d. However, southbound oil traffic would still be blocked. In addition, closure of the Bab el-Mandab would block non-oil shipping from using the Suez, except for limited trade within the Red Sea region."

The IEA goes on to say, "Security became a concern of foreign firms doing business in the region, after a French tanker was attacked off the coast of Yemen by terrorists in October 2002. In recent years, this region has also seen rising piracy, and Somali pirates continue to attack vessels off the northern Somali coast in the Gulf of Aden and southern Red Sea including the Bab el-Mandab."

The Wall Street Journal says another concern for oil is the upcoming Nigerian elections. Jerry Dicolo writes that, "Nigerians will vote for their president, representatives to their national assembly and governors of the country's 36 states over the next four weeks, but there have already been problems. Saturday, Nigeria postponed parliamentary elections due to failed logistics, and on Sunday pushed back all votes one week. Police, military and other security agencies are being deployed nationwide after political rallies turned violent over the past month. And rebel groups have already acted. More than 10% of U.S. oil imports come from Nigeria, according to Department of Energy, so any supply drops would be taxing for U.S. energy consumers' data."

"In January, the U.S. imported 968,000 barrels a day from the country, making Nigeria the fourth-largest oil supplier after Canada, Saudi Arabia and Mexico. In Nigeria, a blast on March 16 rocked an oil facility run by the subsidiary of Italian energy major ENI SpA. The Movement for the Emancipation of the Niger Delta, a militant umbrella group, claimed responsibility and pledged further action. The attack is a reminder of the supply disruptions that came with Nigeria's 2007 elections. Attacks on the country's oil infrastructure stopped the flow of as much as one million barrels a day of oil, forcing customers to scramble for supplies and leaving oil consumers wary of buying Nigerian crude for fear of future disruptions.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


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