Oil's Range Is Well Defined

 | Mar 20, 2012 | 1:34 PM EDT
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Crude oil futures for May delivery on the New York Mercantile in early March hit a 10-month high of $110.95 a barrel. Prices have since backed off just a bit and are well entrenched, on a near-term basis, between $110.95 and $104.00. From a fundamental perspective, crude oil prices have found a stable range.

From a supply-and-demand perspective, bullish factors include the present stalemate between the U.S./Israel and Iran regarding its nuclear program. Iran officials maintain the nuclear progress is aimed at providing more energy for their nation, but the U.S. and Israel believe Iran wants nuclear weapons. Israel has a history of pre-emptive military action in the region to keep its enemies from securing nukes; this tension is placing a $15- or $20-per-barrel premium on the price of crude. That premium would certainly soar, at least temporarily, on any military conflict between the U.S./Israel and Iran, and any significant de-escalation in the situation could produce a quick downdraft in oil prices to the tune of $10 to $15.

The other major fundamental factor in the crude oil bulls' camp is the stabilization, at least temporarily, in the European Union sovereign debt crisis. The EU recently agreed to provide financially troubled Greece with some fresh funding. This move allowed EU bond yields to decline and has assuaged worldwide concerns the EU debt crisis could deteriorate further, or even escalate into a worldwide debt contagion that would crimp demand for crude oil in Europe and likely worldwide.

Limiting the upside in crude oil prices recently is the prospect of a slowing Chinese economy. Chinese government officials, including the premiere, have made recent statements in an effort to tamp down the voracious demand for raw commodities from the world's most populous nation. Any serious economic slowdown in China would hurt other major world economies and likely reduce worldwide demand for crude oil.

Just this week Saudi Arabia said it will work to ensure adequate world oil supply if economic sanctions against Iran start to take Iranian oil out of the marketplace. That's another fundamental factor limiting the upside in crude.

Last week it was erroneously reported by Reuters that the U.S. and other major countries would tap their strategic petroleum reserves soon in order to drive down the retail price of gasoline. The U.S. government immediately denied the report. But where there's smoke there is likely fire: Don't be surprised if the U.S. does dip into the SPR in the coming few months. This possibility is also limiting the upside in crude oil prices.

Barring any geopolitical flare-ups, look for the price of Nymex crude oil to remain between $95 and $110 in the coming weeks -- or longer.

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