Energy prices continued to exhibit significant volatility this week. Gasoline and heating oil prices, as traded on the New York Mercantile Exchange swung ten cents or more per gallon, up and down and up, over the past several sessions.In a recent blog, I noted the critical price support level that $121 per barrel represented for crude oil. That level was tested on July 29th, but follow-through selling failed to materialize, and we are now back on the upswing.
Energy prices are being pushed and pulled due to conflicting economic data points and the situation surrounding Iran’s nuclear program.
The Iran situation dominated early trade on Friday, as Shaul Mofaz, a leading candidate to replace the departing Prime Minister of Israel, Ehud Olmert, and a name that is familiar to regular readers of this blog, has once again saber rattled, verbally. In a speech Friday morning in Washington, Mofaz made the claim that Iran is on the verge of making “major breakthrough” in its nuclear program, and a “second holocaust” would not be allowed to occur. It was Mofaz who last month stated that an attack on Iran was “unavoidable.”
The “breakthrough” assertion is consistent with reported Israeli intelligence that Iran is six months away from being nuclear weapon capable. Western intelligence, including that of the United States, does not share this view.
The rise to record price levels of $147 per barrel were due, in part, to a high level of anxiety over this situation, including a possible unilateral strike on Iran by Israel, at any moment.
The situation calmed, after some diplomatic outreach by the United States and even some tamping down of language by Iran. The unprecedented access given to Brian Williams of NBC Nightly News by Iran’s President was indicative of Iran attempts to manage the situation. In the interview, President Ahmadinejahd seemed to leave the door open a bit for some kind arrangement. However, it is also easy to view this rhetoric as further stalling, as their program advances. This is exactly the sentiment echoed by Minister Mofaz.
Iran is due to answer the United Nations negotiating team this weekend, and they will likely answer on Saturday. By waiting, they will have taken the full two weeks allotted to them to respond, which is not exactly evidence of enthusiasm on their part, either.
In terms of the economy, the US gross domestic product reading of 2.9%, China’s reading of 10.9%, and July job losses coming much less than expected, is supportive of energy prices. I note, as well, that drivers took the road in the past week in numbers not seen since December 2007. Evidently, sub-$4.00 per gallon gasoline has Americans somewhat reinvigorated about hitting the road again.
While the economy certainly seems challenged, these data do not suggest it to be challenged enough to break the back of high energy prices, as a result of reduced demand. I have taken to referring to the situation not as “demand destruction,” merely “demand dissuasion.”
John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.