by David Fessler, Investment U Senior Analyst
Crude prices are fundamentally based on supply and demand. Raise the supply or lower demand, and prices retreat. The opposite also holds true.
Oil tankers can take up to one and a half miles to come to a stop, and up to 10 miles to make a u-turn. That's a long time at the speed of an oil tanker.
The global economy is no different. Economists had hoped the slowdown in the global economy would cause oil prices to retreat. Instead, they've gone up.
While demand has slackened here, it's gone up elsewhere. Long term, demand will continue to increase. In fact, it was just reported yesterday that Goldman Sachs sees China surpassing the United States as the largest oil importer in the next 12 to 18 months.
And as the world's largest economy (ours) continues to climb out of the canyon we fell into a few years ago, we'll begin to consume more oil. That will increase demand, putting an upwards bias on prices.
Clearly oil prices are in a constant state of flux. But there are major trends and events that could cause the price to move rather dramatically, mostly in the upward direction.
Let's take a look at what I believe are the top five:
#1 The Iran/U.S. Powder Keg: Bad News
Right now, there's a lot of saber rattling by both Iran and the United States over the U.S. decision to impose further sanctions on Iran. The latest involve Iran's access to customers to sell its oil.
The United States has persuaded major clearing banks to stop doing business with the country. Iran has threatened to shut down the Strait of Hormuz, a move that would cut off a major source of world supply if they were able to accomplish it (they can't).
However, they could temporarily shut it down, which would cause a sizable spike in oil to at least $150 a barrel, if not more. It all hinges on the length of the shutdown, whether a conflict erupts, etc.
Iran recently announced it would be holding a second set of military maneuvers in the Gulf of Hormuz. This situation could explode at any moment. We're talking about Ahmadinejad here, and a country whose desperation level is growing by the day.
#2 Libya's Rapidly Improving Supply Situation: Good News
The prolonged conflict in Libya eventually led to the overthrow of its autocratic leader, Muammar Gaddafi. Unfortunately, during the conflict, 1.6 million barrels per day of world crude sully was off the market.
Every refinery, pipeline and port facility was in shutdown mode during the civil war.