Oil prices have been below $100 per barrel for quite some time now as the global economy stalled and parts of it are already in recession while others are soon to follow. During the 2008 financial crisis oil prices crashed much lower, this time they have found support around the $85 level and have hovered above that.
Here are the three factors which cause oil prices to move:
1. The global economy. A weak economy translates in weak demand for the black gold and puts downward pressure on the price of oil. Keep in mind that oil is used in many products across the economic spectrum and therefore a good indicator of the overall health of the global economy.
2. U.S. Dollar. Oil, as well as other commodities, is priced in worthless U.S. Dollars. This is very unfortunate as one the severe mismanagement of the U.S. economy has a negative impact on the entire world market. There is a move which has gathered a lot of momentum to price commodities in a currency basket rather than one single currency. We may be five to eight years away from this, but once in place most countries will benefit from that. Until then it remains priced in U.S. Dollars and a weak U.S. Dollar puts upward pressure on the price of oil.
3. Military conflicts in oil exporting countries. One country stands out over the past few years, Iran. A military conflict will ignite an oil rally, especially if Iran is involved in it.
2-1 for an oil rally!
Above we took a quick look in what moves oil process and a rally scored 2-1 and beat a correction. The Iranian situation is especially worrisome.
Here is a short overview of the Iranian situation:
1. The murder of the Syrian Minister of Defense. Syria is Iran’s biggest ally and a fast crumbling Assad regime only adds fuel to the Iranian nuclear program.
2. An Israeli tourist was killed in Bulgaria and Israel accuses Iran.
3. A September Joint Navy Mine Clearing Drill in which 20 nations will participate will be viewed as a provocative move by Iran.
4. Iran has threatened to mine the Strait of Hormuz, and ‘protect as well as police’ the area where roughly one-third of oil traffic passes through.
5. Israel is in its final stages of an airstrike which will be followed by a ground invasion on Iran in order to destroy Iran’s nuclear facilities. Iran has mentioned over and over again that Israel needs to be wiped out according to them. Unfortunately Iran has moved its nuclear military facilities out of reach of airstrikes and therefore need to be located and destroyed in a ground war. Such a war will be extremely long given the strength and will to fight of the Iranian Revolutionary Guard.
A military conflict will add $100 per barrel to the price of oil within weeks. Although a military conflict with Iran may be months away, keep your eye out for it as it may happen much sooner then that