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Kilduff: Iran Diplomacy = Lower Oil Prices?

Energy watchers need pay close attention to the outcome of the Saturday meeting in Geneva, among Iran, European Union representatives, and most interestingly, the United States. Secretary of State Condoleezza Rice has confirmed that this meeting represents a change in U.S. policy toward Iran.

In my view, much of the recent pullback in crude oil prices centers around the lessening of fears over the potential for an attack on Iran’s nuclear facilities by the U.S. and/or Israel.

In two short weeks, the energy market has gone from dealing with rumors that Israel had war planes in the air and on the ground in Iraq -- in preparations for an attack on Iran -- to witnessing the first high-level direct talks between the U.S. and Iran since the 1979 Iranian revolution. This, is in addition to word that the U.S. is considering opening a sort of sub-embassy in Iran, referred to as an “interests section.”

What a difference two weeks can make!

The crude oil market’s weakness this week may prove lasting. In technical trading terms, the oil chart carnage is patent and reflective of the hits taken, most notably, by corn and natural gas. Crude oil could now extend its losses all the way down to $121.61. Consumers should keep their fingers crossed.

Gasoline prices have fallen 40 cents from their recent high, and, for the most part, spot checks of the wholesale markets in the Gulf Coast and Los Angeles have followed suit. Relief at the pump is already showing up, and I would expect prices to fall as much as nickel a gallon over the course of the weekend.

As I mentioned above, the outcome of Saturday’s meeting is the key to follow-through selling next week -- or could provide the makings of a reversal of prices back higher. Regardless, I would expect a relief rally to start things off on Monday, and then watch to see if prices can maintain themselves. Keep in mind, the ability of this meeting to disappoint market watchers is great, right now.

In terms of trying to make some money off these recent moves, investors might want to revisit the beleaguered refining sector. Even slightly lower gasoline prices should result in modest up-tick in demand for fuels. The profit margin on gasoline refining rose seventy-five cents today, and I would look for this to continue.

Sunoco, Tesoro, and Valero are the pure plays in this space, and they have all fallen a long way. Any rebound in gasoline sales will benefit them the most.

The fall in energy prices is proving to be a great salve for the equity markets, and we can only hope that it will continue. Interestingly, of all the ideas floated or considered for what could be done to lower oil prices by the government or anyone else, it never dawned on me that a diplomatic overture to Iran might be a winner.

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John Kilduff
John Kilduff

John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.

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