What's going on?

The price of oil went as much as 6% higher yesterday as Saudi Arabia, backed by a ten-country Sunni coalition, conducted air strikes against the Shia Houthis in Yemen. The oil price increase was later pared to a gain of around 2% on the day, as analysts highlighted the small amount of production that comes from Yemen, but traders remained wary of burgeoning tension between Saudi Arabia and Iran.

What does this mean?

From a financial markets standpoint, the dramatic increase in the price of oil initially may point to the significant number of market participants that are now short oil � that is to say, they are betting on the price of oil going lower. When there is a large move like there was initially yesterday, it is often driven by short-term unwinding of positions, as the �fast money� traders look to pare back their risk as the market moves against them. This sort of price action could suggest that the market as a whole is positioned such that oil prices could be well supported at this level, despite widespread expectations that production cuts will not occur quickly enough to offset the increasingly oversupplied market.

Why should I care?

The price of oil is a key cost input in many people�s lives and the recent fall in its price has been likened to a tax cut for people who could be expected to spend their money on other goods and services, thus boosting the economy. One can also invest in oil itself, most easily by buying an exchange traded fund (ETF) that tracks the price of oil. It is virtually impossible to predict the path of geopolitical events and their effect on the price of oil, however it is interesting to note the apparent �short-covering� rally that oil may have experienced yesterday. This is one factor that suggests the price of oil might be nearing a bottom and as production cuts eventually occur over the next few years, the price of oil is likely to go higher.