By Barani Krishnan
NEW YORK (Reuters) - Oil prices rallied for a second straight day on Thursday after Saudi Arabia and its Gulf Arab allies began air strikes in Yemen, sparking 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 yet affected oil facilities of major Gulf producers.
But fears the conflict could spread has stoked concerns about the security of Middle East shipments, even as analysts and commentators doubt the probability of an all-out war amid continued signs of crude oversupply.
Benchmark Brent oil jumped 5 percent early in the session before giving back some of that in European trade as the dollar rebounded from Wednesday's drop, making commodities denominated in the greenback costlier in other currencies. [USD/]
In New York, Brent
"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.
"That aside, there is a growing realization that the oversupply in crude may not be the only thing in pricing oil now," Flynn said.
Yemen's relatively small oil output has been disrupted for months by the conflict. More importantly, 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" to global oil supplies. The EIA estimated 3.8 million barrels per day passed through Bab el-Mandeb in 2013.
Egypt has sent naval vessels to help secure the sea lanes, while Kuwait boosted security around its oil sites. Iran, which backs the Houthi rebels, denounced the Saudi strikes.
Michael Cohen, who heads energy research at Barclays, 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.
(Additional reporting by Jessica Resnick-Ault in New York; Himanshu Ojha, David Sheppard in London; Aaron Sheldrick, Osamu Tsukimori in Tokyo; Meeyoung Cho in Seoul; Henning Gloystein and Florence Tan in Singapore; Editing by Marguerita Choy)
