Oil Up as Saudi Arabia Starts Bombing Yemen

2015-03-26T174159Z_1123589610_GF10000039490_RTRMADP_3_YEMEN-SECURITY
People watch a vehicle which belonged to Shi'ite Muslim rebels burn during clashes in Aden March 26, 2015. Nabeel Quaiti/Reuters

NEW YORK (Reuters) - Oil jumped about 5 percent on Thursday, rallying a second straight day, after air strikes in Yemen by Saudi Arabia and its Gulf Arab allies sparked fears of a bigger Middle East battle that could disrupt world crude supplies.

The military operation against Houthi rebels, who have driven the president from Yemen's capital Sanaa, has not affected oil facilities of major Gulf producers.

But fears the conflict could spread has stoked concerns about Middle East oil shipments. Saudi rival Iran, which backs the Houthi rebels, denounced the air strikes. Russian President Vladimir Putin, in a phone conversation with his Iranian counterpart, called for an "immediate ceasefire." Pakistan, a Riyadh ally far away from the conflict, promised a "strong response" to any threat to Saudi integrity.

U.S. Secretary of State John Kerry touched on the conflict with Iran's foreign minister before talks on Thursday on Tehran's nuclear program.

Analysts doubt any possibility of an all-out war and say only a temporary lift to oil prices is expected amid continued worries about oversupply.

Benchmark Brent oil jumped more than $3 a barrel before paring gains as the dollar rebounded from Wednesday's drop, making dollar-denominated commodities costlier in other currencies. [USD/]

Brent settled up $2.71, or 4.8 percent, at $59.19 a barrel. U.S. crude finished up $2.22, or 4.5 percent, at $51.43. Oil prices rose 3 percent on Wednesday on a weak dollar.

"A lot of times you get the market reacting dramatically right off the bat to events like these, before people begin putting things in perspective after a greater study of the risks involved," said Phil Flynn, analyst at the Price Futures Group in Chicago.

Arab producers have to ship their crude past the Yemen coastline via the Gulf of Aden to get to the Suez Canal, a key passageway to Europe.

The waters between Yemen and Djibouti, known as Bab el-Mandeb, are less than 40 km (25 miles) wide, and considered by the U.S. Energy Information Administration to be a "chokepoint" for global oil supplies. The EIA estimated 3.8 million barrels per day passed through Bab el-Mandeb in 2013. Egypt sent naval vessels on Thursday to help secure the passage.

Barclays analyst Michael Cohen said the conflict potentially exacerbates tensions in Libya, Syria and Iraq, with Saudi Arabia becoming an activist of its regional policy.

"What's going on right now is a trend in the region," he said.