Oil Markets Watching Dollar, Not Turmoil in Iran

A massive turnout is expected in Tehran Friday when Iran's Supreme Leader Ayatollah Khamaneni leads Friday prayers. It is apparently a rare occasion for him to do so, and it follows the fourth day of protests against Iran's highly disputed re-election of Mahmoud Ahmadinejad.

On Thursday, tens of thousands joined opposition leader Mir Hossein Mousavi, filling the streets in Tehran to mourn slain demonstrators. Iran's Supreme Leader has urged against violence at tomorrow's prayer service, but in light of what has occurred since last week's election, the outside world appears to fear the worst.

But not the oil market.

Traders that I have spoken to on the floor of the New York Mercantile Exchange and on trading desks around the country are watching the developments in OPEC's second largest producer, but they're not that overly concerned.

Several traders have pointed to the amount of spare capacity in the global oil market as a reason not to be worried about the impact to oil supplies, even if there was a temporary disruption. As Tradition Energy's Addison Armstrong said, "unless this turns into Tiananmen Square, the oil market is not reacting to Iran."

But PFC Energy analyst David Kirsch points out that this is Iran's Tiananmen Square. The presidential election has revealed "the deep schism within the senior ranks of Iran's political elite and the challenge to the existing order posed by neo-conservative leaders," he wrote in a report earlier this week.

"This is a momentous occasion in Iran, but everyone (in the oil market) is watching the dollar," Kirsh said.

Indeed, oil traders remain fixated on the dollar and on stocks. Oil has traded in a tight $4 range — between $69 and $72 a barrel — for most of this week as the dollar index has rebounded slightly and stocks bounce along. U.S. light, sweet crude , which settled up slightly today at $71.37 a barrel, is still down for the week, closing today below last Friday's close of $72.04.

Despite the Iranian situation, oil prices could slide going into the weekend as Monday marks the expiration of July NYMEX crude oil futures.

"With all of the oil in the ground, no one has to take front month delivery, so we could see a sell-off tomorrow," Armstrong said.

© 2012 CNBC.com