Why Yemen war may worry Gulf more than low oil prices

Civil strife and terrorism in Yemen could pose a greater threat to the Gulf countries of the Middle East than tumbling oil prices, a major bank said on Tuesday.

"We can't help but think that the turmoil in Yemen is the emerging and underappreciated risk for investors in GCC (Gulf Cooperation Council) stocks," said Citi analysts Josh Levin and Rahul Bajaj in a research note distributed from London on Tuesday.


Houthi rebels take security measures with tanks around the parliament in Sanaa, Yemen, in February 2015.
Mohammed Hamoud | Anadolu Agency | Getty Images
Houthi rebels take security measures with tanks around the parliament in Sanaa, Yemen, in February 2015.

Despite worries about Islamic insurgency and destabilization in the Middle East and North Africa, investors in the oil-exporting GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) have focused on the potential hit from the slump in energy prices, with crude oil down around 50 percent since a peak in June 2014.

Read MoreOil collapse will hit the Gulf, but don't panic

However, Levin and Bajaj said that increasing strife in Yemen—which borders Saudi Arabia to the south and Oman to the west— could be an "underappreciated risk" to the GCC.

"One of the key takeaways from our GCC trip in early February came from an executive in Qatar who observed that while most people are focused on the price of oil, the recent instability in Yemen posed a greater and underappreciated risk to the GCC. Recent events appear to bear out this executive's observation," they said on Tuesday.

Yemen is in the grips of a worsening civil war, with fighting intensifying between ousted Sunni President Abd-Rabbuh Mansuh Hadi and the Shiite, anti-American rebels who seized power in a coup in January.

The rebels also face violent resistance from Sunni tribesman and competing Islamist extremists in the south. Last week, suicide bombers opposed to the rebels killed 137 people and injured more than 300 others during Friday prayers in the Yemini capital of Sana'a.

On Monday, the Saudi Arabian foreign minister said the GCC would take "necessary measures" to resolve the Yemeni conflict, according to media reports. This is in response to requests for military assistance from Hadi, who belongs to the same Muslim Sunni sect as Saudi Arabia's leaders.

Levin and Bajaj warned that the turmoil in Yemen had the potential to spill over into nearby countries.

"We have no edge or ability to predict whether or not the conflict in Yemen will spill over into neighboring countries or impact other GCC countries," they said.

"However, we observe that the scope and pace of events in the Middle East (the 'Arab Spring' and its attendant local conflicts, the spread of ISIS, etc.) over the past few years has taken almost everybody by surprise."

Read MoreWhy the chaos in Yemen matters to investors

The analysts noted that the risk of unrest spreading could hit stocks in the GCC—which has previously been seen as something of a safe haven in an "otherwise tumultuous part of the world." This in turn has benefited countries' economies and banking systems.

"We conclude that the tail risk for the GCC bank stocks has grown fatter," Levin and Bajaj said. "That is, although the likelihood that regional events will negatively impact the GCC remains very low in an absolute sense, the likelihood is greater than it was a month or two ago."