Perfect Storm for Higher Oil Prices Negotiations at the nuclear energy talks with Iran continue to deteriorate. While this alone is enough to keep oil prices high, other events are providing even more of a catalyst for higher oil prices. Last week, a suicide bomber in Bulgaria killed eight Israelis. While this news is tragic and horrible in itself, it is taking on another dimension in the nuclear energy talks, because Israel is blaming Iran for the attack. Iran has denied any involvement with the incident, but oil prices are rising on news of it. This incident has now added to the already tense nuclear energy negotiations. Iran defiantly stated that it was considering blocking the Strait of Hormuz to prevent oil from other Middle Eastern countries from getting to its destination in response to the increased sanctions levied on the country by the U.S. The U.S. military immediately dispatched more navy ships into the area to prevent Iran from taking such an action. Iran’s response was to equip its warships with shortrange missiles. With this backdrop, it is hard to imagine how any settlement can be reached in the nuclear energy talks. Investors are thinking along the same lines, which is why oil prices have moved higher in the last few weeks. Besides the increased tensions with the nuclear energy talks, the other factor moving oil prices higher is the weakening U.S. economy. From retail sales to durable goods to unemployment, almost all of the economic numbers coming in from the U.S. have been weaker. While this should be bad news for the stock market and oil prices in general—since a weak economy means less demand for oil—it is actually the opposite. Investors have been speculating for months now on whether the Federal Reserve will enact QE3. Fed Chairman Ben Bernanke has stated that he is clearly ready to begin QE3 if the economy worsens here in the U.S. The economic reports have been highlighting the fact that the U.S. may enter a recession in the second half of 2012. Considering these results, the odds have increased that the Federal Reserve will enact QE3. More money printing means higher commodity prices, which translates into higher oil prices, because oil prices are one of the most sensitive commodities to the printing of more money. So while demand for oil is actually not rising, the increased tensions with Iran concerning the stalled nuclear energy talks and the prospect for QE3 are actually pushing oil prices higher. Since these two factors are not going to subside anytime soon, it looks like oil prices will continue to rise.
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