From the April 01, 2011 issue of Futures Magazine • Subscribe!

Oil striking it rich

There’s a reason oil is known as “black gold.” While it had stayed mostly in the $90 range since Jan. 1, it spike after the Libyan civil war began as it added a fear-premium that oil supply may be disrupted in the near future.

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“There’s no doubt that what we’re seeing in oil is historic. We have historic up-side and down-side risks,” says Phil Flynn, senior energy analyst at PFG Best. “On the down-side is what’s happening in Japan. In the short-run, this is very bearish as there is demand destruction. Then there are the changes occurring in the Middle East. The uprisings we’re seeing are on an unprecedented nature.” Chief among the Middle East concerns are Saudi Arabia, Bahrain and Iran – what Flynn is calling the “Axis of Risk,” – because oil could double if those areas descend into chaos. Moving forward, Flynn says to keep eyes on world events and watch Japan’s rebuilding. He sees resistance in the May contract at $108-$110 and support at $90 if things really calm down in the Middle East.

Keith Springer, president of Springer Financial Advisors, agrees that Middle Eastern tensions have added a fear-premium to the price of oil, but says that OPEC has been doing its part to keep prices at least under control. “Oil prices are going to stay $90-$100. OPEC wants them there; it’s in their best interest,” he says. “Anything above that chokes off economic growth. If they go too high, say $120-$130, that’s a real negative and will push the economy back into recession and oil back below $50.” While Springer expects oil to be range bound at $100-$110 in the short-term, he expects it to eventually settle back into the range of $90-$100.

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