Thursday (July 10) was another in a long run of recent trading days that shows just how much downward price resistance is in the way of crude oil. Following another recent dip, which pushed the commodity down to $135, light sweet crude oil speculators pushed oil futures back up over $140 with a $5 gain Thursday.

The big news that affected trade Thursday was an announcement of another Iranian missile launch. This perpetuated mounting concern that tension in the Middle East will continue to cut into already thinning oil supply. Continued drops in Middle East oil supplies are expected to be one of the leading catalysts that move oil prices higher.

Along with the political tensions, flooding and weather that damaged billions in corn crops in the Midwest are expected to produce higher corn prices. Higher corn means higher ethanol, which is a major ingredient in US oil mixes. Additionally, despite drops in general demand for oil in the US, developing countries continue to use oil for production and construction. Americans also did not let high gas prices prevent them from driving at a normal level over the Independence Day holiday weekend.

Crude oil had dropped over $10 per barrel Monday and Tuesday. Thursday’s gain of $5.60 per barrel sent futures to $141.65 in New York Thursday. This was the largest single day gain for the futures since June 6. Not only is the political tension in the Middle East preventing drops in oil prices, the big fear is that Iran might respond to threats by blocking the flow of oil tanker traffic through the Straight of Hormuz. This is where 40 per cent of the world’s tanker traffic moves through.

Iran was not the only oil producing country that faced turmoil Thursday. A militant group in Nigerian continued a trend of targeting oil producing refineries. Ongoing tension in the region has restricted oil output for the last two years.

Many analysts still believe we may be near the peak of oil prices in the current bull market. They argue that growing demand reduction in developed US and European markets will eventually outweigh demand in developing countries like China and Brazil. Airlines have cut flights, freight carriers have limited routes, and even average Americans have reached a boiling point and are monitoring their driving habits.

The International Energy Agency out of Paris just raised its annual forecast for global oil demand to grow by one per cent this year. This is up from its previous forecast of .9 per cent. However, the group is among those that believe the bull market might be at its peak given drops in consumer demand in the US and increased interest in hybrid and alternative transportation energy.

The dollar remains a big hurdle in helping drive oil prices down. The dollar has failed to gain any significant momentum in its effort to dig out of a year long slumber against most major currencies. A relatively weak greenback remains one of the biggest stumbling blocks to an oil drop. Some economists cite optimism for the US economy and credit markets when suggesting that the dollar is primed for a rebound in late 2008 or early 2009.

According to AAA and the Oil Price Information Service, retail gas average $4.104 Thursday. This was just a shade below the record high of $4.108 for a gallon of gas on Monday.

Market Recap

Wednesday was a down day for equities. The Dow dropped 236 points while the NASDAQ gave back 59. However, the big news of the day was the 29 point drop in the S&P which sent the broadest index into its first bear trend since 2002. This is bad news for the near-term direction of equities. Despite financial worries, stocks went up Thursday with no strong market mover. The Dow regained 81 points from its big drop Wednesday. The NASDAQ was up 22, with the S&P up 8 points. One positive note in the credit market was news that creditors have not been relying on the emergency loan program recently.

Neil Kokemuller
Thursday, July 10, 2008
10:51 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.