Crude Bulls Ride Iran Fears

December 29, 2008

(bettertrades) - Crude climbed back near $40 per barrel Monday morning, but gave back much of its advance by midday despite lingering fears over continued instability in the Middle East. Ongoing deterioration of events in the latest uprising of violence in Gaza was described by Israeli Defense Minister Ehud Barak as "all out war" and "a war to the bitter end".

At the heart of the Arab conflict lays the Israeli-Palestinian conflict. Despite minimal production, reserves, and shipping routes operated within the disputed territory, instability between Israel and Palestine has historically sparked dramatic swings in the energy patch. Geopolitical instability is often a cause for up trends in crude prices. Arab-Israeli disputes, conflict in the Niger River Delta, and the Russian invasion of Georgia highlight notable recent global flare ups factoring into the oil equation.

Crude's 6% spike up coincided with Israeli warplanes battering of Hamas-controlled regions in the Gaza strip.

If little actual disruption is caused by conflict between the two warring nations, why are energy prices so sensitive to tensions in the region? There answer is simple: Iran.

It's no secret Iranian President Mahmoud Ahmadinejad wants to see Israel "wiped off the map". Iran is home to the world's second-biggest holding of untapped reserves (Estimates hover around 16% of total world reserves), in addition to controlling the narrow shipping route on the Persian Gulf. Any substantive response by Iran could trigger an exponential escalation of tensions in the region with potential shockwaves spreading across the globe.

Hamas, designated a terrorist organization by the United States, is backed financially and politically by Iran, often operating at odds with PLO Chairman Mahmoud Abbas' conciliatory Fatah party. With Iran acting as its benefactor, Hamas has been able to inject itself onto the political platform in Palestine, making duel-state negotiations increasingly difficult.

In addition to Middle East tensions, crude prices are finding support via depressed prices, a weakening dollar, and year-end short covering. But the Israel-Palestine conflict and resultant Iran question lay at the heart of Monday's energy rally.