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
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
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.