According to a March 30th report from Nomura Markets Research, the conflict in Yemen is just another proxy war between Iran and Saudi Arabia, and is not likely to be settled any time soon. The good news, however, is that the ongoing fighting in Yemen does not immediately threaten substantial oil production.

Nomura’s Alastair Newton suggests that the ongoing conflict in Yemen between the Shia Houthi rebels and the Saudi-backed Sunni government is just another battlefield in the never-ending war between Shias and Sunnis. He notes that there is little real risk to significant oil infrastructure at this point, but also says there is “little likelihood of Saudi Arabia’s stated objective to make Yemen “stable and safe” being achieved in the foreseeable future and therefore see a significant possibility that the conflict will escalate further.”

Oil production not threatened yet

Newton notes that financial markets seem to have come to the conclusion that the decision of a Saudi-led Sunni Arab coalition to launch airstrikes against Yemen’s Shia Houthi rebels poses no immediate threat to regional oil production. He also points out that Yemen only pumps around 100,000 bpd of oil, not enough to have a major impact on global supply of itself even if the entire output output were offline.

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Newton also points out that although the Houthis can attack border area with Saudi Arabia, they are very unlikely to pose any threat to oil output. Moreover, if there were a real threat to shipping in the Bab El-Mandeb strait (which carries 3 mbpd of crude heading into the Red Sea en route to Suez), then markets would be reacting. Analysts say the Houthis do not currently have the means to blockade this potential bottleneck, never mind the large Saudi and Egyptian naval presence in the area.

While the current situation is not yet overly worrisome, Newton highlights there are “solid grounds for deeper concern which may yet give rise to justified market reaction.”

Understanding the “Crescent of Chaos”

The concept of the ‘Shia Crescent’ refers to a geographical arc stretching from Lebanon through Syria, Iraq, Kuwait (large Shia minority), eastern Saudi Arabia and Bahrain to Yemen, with Shia-dominated Iran to its east. As many political analysts have noted, the Shia Crescent is in effect a ‘fault-line’ splitting the Middle East between Sunni and Shia Islam.

Then, around two years ago as the civil war in Syria continued to escalate and cross borders, David Gardner of the Financial Times and other journalists started to refer to the ‘crescent of chaos’, pointing to the deterioration in relations between the two branches of Islam.

Newton says he agrees with the general consensus among political analysts that Saudi Arabia’s military action against a neighboring state is a clear escalation of a growing regional power struggle with Iran, and, by implication and reality, between Sunni and Shia. Newton lists several factors as leading to Saudi Arabia’s decision:

Iran’s growing influence in Iraq, especially the leading role of Shia militias, under the guidance of the Quds force of the Islamic Revolutionary Guards Corp (IRGC) in operations against ISIS;

The ongoing Iranian support for the Alawite (another branch of Shia) regime of Bashar al-Assad in Syria (and Shia Hizbollah continuing to provide military support to Damascus);

Iranian support for the Shia majority in Bahrain in opposition to its Sunni-dominated leadership;

Worries that a potential nuclear deal with Iran could eventually lead to rapprochement between Washington and Tehran, leaving Riyadh more exposed internationally.

To sum things up, Newton says he agrees with international relations expert Richard Haass that: “The modern Middle East is like 17th century Europe, enmeshed in violent and costly political and religious struggles within and across borders that could last three decades longer”.

Ground invasion of Yemen very risky

Newton also highlights the numerous risks involved with a potential Saudi (and Sunni allies) ground invasion of Yemen.

He begins by pointing to the less than stellar history of Saudi invasions of Yemen, and even describes a possible worst-case scenario: “Furthermore, a Saudi-led land assault into Yemen could, I believe, lead to Iran (whose material support for the Houthis to date has, in my view, been overstated) being drawn deeper into the conflict (noting that several press agencies, including the BBC, have been carrying unconfirmed reports that Iranian pilots have already been providing the Houthis with air support during their advance on the southern port of Aden). In extremis, this could see what is still, in essence, a ‘proxy war’ turning into a direct clash between Saudi Arabia’s well-equipped and technologically superior but inexperienced forces and the battle-hardened elite Quds force of the IRGC (possibly supported by Hizbollah).