As Tensions Mount, So Do Oil Prices

Oh my, the price of the June light crude on the NYMEX surged to over $75 a barrel in Friday trading, a new contract high and extended the strong price appreciation that began in late March. The rate of the price appreciation in oil has been impressive, but the angle of the trendline appears to be somewhat steep and may be vulnerable to some near-term selling pressure.

 The June contract is also extremely overbought given the accelerating price so we could see some near-term profit taking. Even so, the near-term and mid-term technical signs for June oil are bullish, driven by rising and strong Relative Strength. We may see some hesitation after the break at $75 and could see some selling back down to $72, but the picture looks bullish.

 Geopolitical factors are helping to drive up oil prices. Tensions in Iran regarding its nuclear program and continued disruptions in Nigeria are pressuring oil prices.

 As far as the supply-demand metrics, there are increased concerns of disruption on the supply side. Add in the surging demand from oil hungry China, India, and the United States and you have an ideal condition for an equilibrium imbalance and a trend of higher prices.

Advertisement

 The situation in Iran looks worrisome and reminds me of what happened in Iraq. Washington is promising to stop any flow of nuclear weapons or the creation of nuclear weapons in Iran. Iran, of course, has its own motives and is unlikely to listen to the United States. What make the situation somewhat scary are comments from President George W. Bush who has refused to rule out the use of military action including the use of nuclear strikes!

 On the production side, the Organization of Petroleum Exporting Countries is speculated to be already pumping at full capacity and is unable to pump more oil into the system.

 So, get ready for potentially higher prices down the road and a test of $80 a barrel if the Iran situation worsens and demand fails to subside.