Friday, April 25, 2008

Crude Oil Spikes...Will it Ever Come Down?

Crude oil spiked today on news of a ship contracted by the U.S. firing over an Iranian ship. Geopolitics is one major factor of oil prices. That's why any threat of military intervention with Iran will bump oil prices. Is the market pricing in action in Iran? I would say no. The other major factors of the price of oil are:

1)Simple supply and demand. Fears of an economic slowdown, either in the US or entire world, are what caused a short dip in oil prices early in 2008. Although this didn't last long because of factor 2.

2)The weak dollar. The crude oil we speak of is priced in dollars. The dollar has declined drastically over the past year, thus naturally causing an inflation in the price of many things, specifically in-demand commodities.

Take a look at this post and chart from Bespoke Investment Group.

Although geopolitics plays a role in oil prices, right now its seems the biggest threat to oil prices is the dollar. If we see some short-term strength in the dollar, which is possible, oil prices could see a correlation.

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