Crude oil futures spiked to a 30-month high on Monday - and crude prices have zoomed 19% so far this year - so it's no surprise that energy stocks have enjoyed one whale of a run.
Even so, energy stocks continue to top my list of favorite plays - and for one very good reason. I'm talking about Yemen.
Small Country/Big Potential Impact
Oil futures rose past the $108-a-barrel level in New York yesterday (Monday), a price point they haven't seen for 30 months. Ask the typical American consumer why oil prices have taken up residence in such a pricey neighborhood, and you'll likely hear about the unrest in Egypt, Libya, Tunisia and Saudi Arabia.
Going forward, however, the next culprit in this saga of rising oil prices figures to be a tiny Middle East country called Yemen.
Yemen, which is bordered to the north by Saudi Arabia, to the west by the Red Sea and to the east by Oman, produces about 300,000 barrels of oil per day - about 95% of which is exported. In fact, because it sits at the crossroads of the Red Sea and the Gulf of Aden, Yemen is actually quite strategically positioned: On a daily basis, about three million barrels of Saudi crude float past - most of it destined for the United States and Asia.
That means that Yemen is positioned at a major "choke point," for the regional distribution of oil. And it's also shaping up as the next big catalyst for rising oil prices. Yemen has been an ally of the United States and the Saudis for decades, and its long-time president, Ali Abdullah Saleh has been battling rebels in his northern deserts for years.
Now, however, another war is being waged for control of the government in the Yemen capital. The rebellion started small, but it has exploded. Protestors have been shot, and the President Saleh's erratic public announcements make him seem unstable.
Here's why this is all so important.
According to analysts with TIS Group, foreign oil companies are responding to this unrest with a "partial response" - and are sending some of their workers home. Occidental Petroleum Corp. (NYSE:OXY), DNO International ASA of Norway (DTNOF.PK) and OMV AG (OTCPK:OMVKY) of Austria have all announced they are evacuating personnel.
In Yemen, as elsewhere in the Middle East, expatriates are largely responsible for running the oilfields. And when those "expats" hit the road, oil production tends to go straight down.
In Libya's case, when the Italian oil giant Eni SpA (NYSE:E) began to evacuate, production fell from 1.6 million barrels per day (bpd) to around 500,000 bpd, according to analysts. (This was so problematic that Eni Chief Executive Officer Paolo Scaroni was in Benghazi on Saturday, where he "had contacts with the Libyan National Transitional Council to restart cooperation in the energy sector and get going again the collaboration with Italy in the oil sector," Italian Foreign Minister Franco Frattini told reporters yesterday.)
In Yemen's case, the rebellion is now fully engaged in the north where most of the country's oil facilities are. And that means exports could drop quite quickly - even more than they already have.
This will have a dramatic impact on the worldwide price of oil. If the Yemen government falls into the hands of anti-Western rebels, the development would put the three million barrels per day of Saudi oil floating past its coast in jeopardy. But also you have one more major oil exporter that is then not exporting.
This is occurring at a time when the excess production capacity once claimed by the Organization of the Petroleum Exporting Countries (OPEC) is gone. In order to make up for this, oil prices have only one way to go - and that's up.
Moves to Make Now
The bottom line: This is all supportive of higher profits for the companies in two of the exchange-traded funds that I like to recommend to readers: The SPDR S&P Oil & Gas Producers ETF (NYSEARCA:XOP) and the SPDR S&P Oilfield Services ETF (NYSEARCA:XES).
With Libya's northern refining towns having fallen back to Moammar Gadaffi-controlled forces late last week, it looks like even more capacity is being taken out of the world's oil markets and that the next leg higher in crude oil prices is about to begin. Energy positions were the best of the first quarter, and that is likely to persist at least into the rest of the first half of the year.
Here's one final bit of food for thought when it comes to energy prices. We've all heard about the "emergence" of China's new, consuming middle class. If China's consumers come to use the same amount of oil per capita as their American counterparts, the exploration industry will need to find the equivalent of seven Saudi Arabias to supply them.