As Tensions Rise, So Will Oil Prices

When oil prices fell below technical support at $70, investors decided to pump the market higher thinking that maybe oil prices were heading lower. But, my contention is the positive trend remains intact. The June light sweet crude on the New York Mercantile Exchange surged over $72 a barrel in Thursday trading to $72.86 as tensions mounted in Nigeria.

The reality is oil may only be taking a pause at this time, but the picture looks bullish. The recent rally from late March to late April that drove the June contract from the $62 level to over $75 a barrel is currently in reverse, failing to hold at above $75 on two consecutive attempts, forming a bearish double top. But, while the near-term trend appears to be down, I still think there is upside left in oil. The current world conditions suggest higher prices.

We have the tense situation in Iran, a major oil producer. There continues to be a war of words between hard-line Iranian President Mahmoud Ahmadinejad and the White House. A letter sent by Ahmadinejad to President Bush was quickly rejected. The continued failure to satisfy Washington that Iran’s nuclear development is for peaceful purposes will continue to raise the threat of a potential military conflict between a U.S. led coalition and Iran.

 The situation closely mirrors that of what had happened between the White House and Iraq when a change in regime was desired. It is clear that Washington, and probably the world, would prefer a more moderate Iran versus the current ultra conservative regime led by Ahmadinejad.

 As long as this situation remains unresolved, I expect upward pressure on oil prices. The threat of a potential conflict is real. The United Nations will need to address the tense situation and try to resolve it. Iran cannot be allowed to develop nuclear technologies under the current regime. Because of this, oil prices will maintain a positive bias and this is not good.