Oil Falls, Gets Support From Yemen Conflict

Oil prices fell Friday on profit-taking and a strong U.S. dollar but the escalating conflict in Yemen was still capturing the attention of the market.

Prices surged Thursday after Saudi Arabia and its allies launched airstrikes against Iran-linked Houthi militants in Yemen, though some analysts said the overall impact on oil supply would be minimal and wouldn't change the fundamental picture of an oversupplied global market.

Investors were also bracing for data later Friday on the number of oil drilling rigs in the U.S. The rig count by has been falling dramatically in recent months, feeding some investors' optimism that U.S. production growth will soon start to slow.

Brent crude for delivery in May exchange slid 2.1% to be at $57.95 a barrel on London's ICE Futures. On the New York Mercantile Exchange, May-dated light, sweet crude futures recently traded at $50.10 a barrel, down 2.6% from Thursday's settlement.

"Yemen itself is neither significant to global crude supplies nor is it, tragically, unaccustomed to violence and war," Edward Morse, global head of commodities research at Citigroup, wrote in a note.

While Yemen is only a small oil producer, the country lies at the heart of some of the most important energy routes. The strategic Bab el-Mandeb Strait is one of the world's main transit points for seaborne trade linking the Mediterranean Sea and the Indian Ocean.

"Yemen's strategic location on one side of the Strait of Bab el-Mandeb elevates its importance to global crude trade above its own domestic production," Mr. Morse said. "However.. there is no indication that either side in the conflict has the means or the intention of disrupting these flows."

A rally in the U.S. dollar was pushing oil prices down on Friday. Oil, which is priced in dollars, becomes more expensive for holders of other currencies as the dollar appreciates. The Wall Street Journal Dollar Index, which tracks the dollar against other major currencies, rose 0.4%.

Oil-market participants are awaiting the latest rig count data by oil-field service company Baker Hughes. The number has fallen by around half since a peak in October.

Some analysts cautioned that a reduction in the number of rigs doesn't immediately translate into a fall in U.S. output, which is currently running at a multiyear high of 9.4 million barrels a day.

Investors are also tracking the negotiations over Iran's nuclear program before a March 31 deadline.

"The real action for oil markets is in Iran, where negotiations with world powers are reaching a critical stage," Daniel Hynes, senior commodity strategist at ANZ Bank, said in a report. He said anywhere between 14 and 18 supertankers are storing oil off the coast of Iran in the Gulf of Oman, equal to more than 30 million barrels.

"In the unlikely event that sanctions are immediately lifted, the threat of Iran's inventories hitting the market could see Brent oil prices hit recent cyclical lows," Mr. Hynes said.

Nymex reformulated gasoline blendstock for April--the benchmark gasoline contract--fell 2% to $1.8438 a gallon, while ICE gasoil for April changed hands at $540.25 a metric ton, down $5.25 from Thursday's settlement.

Eric Yep in Singapore contributed to this article.

Write to Georgi Kantchev at [e-mail]

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