Market Insider

Oil Prices: Italy Now...But Iran Later?

Oil edged towards $100 a barrel Tuesday, but it was developments in Italy, not a much-anticipated report on Iran's nuclear program, that drove it there.

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Nymex crude ended the session at $96.80, a gain of 1.3 percent, and its highest level since July 28, after a late surge on reports Italian Prime Minister Silvio Berlusconi offered to resign.

Crude was higher for a fifth day and has been rising, in part on anticipation about the report outlining Iran’s nuclear weapons efforts from the International Atomic Energy Agency.

While the report did not prove to be the major driver of energy prices Tuesday, still, traders say the evidence outlined by the U.N.’s nuclear watchdog renews concerns about the potential for military conflict in the region.

"The agency has serious concerns regarding possible military dimensions to Iran's nuclear programme," the IAEA said in the report, including the use of computer modeling of nuclear warhead core, and developing a nuclear payload onto its intermediate range missile, which has the capacity to reach Israel.

“Hand in hand with the report is the thought that Israel may take it upon itself to do something about it,” by launching preemptive strike on Iran, said Addison Armstrong of Tradition Energy.

“We all have a pretty good idea of what would happen to oil prices if Iran's nuclear facilities were in ashes,” he said.

Israeli officials played down speculation that they would launch a unilateral attack on Iran. But if Israel were to act, some traders see the potential for a strike before the end of the year, while U.S. troops are still in Iraq, just across the boarder from Iran.

“That changes things considerably,” concludes Ray Carbone of Paramount Options. “The Israelis would prefer we had a sizable force in Iraq if they did something. When we leave they lose a lot of leverage.”

Beyond the threat to Israel, energy Citi Futures analyst Tim Evans says Iran’s nuclear ambitions are potentially destabilizing for others in the region, and for energy production.

“The risk is that there is a power struggle to be waged in the Middle East,” Evans said, though he believes the geopolitical risk premium may be overstated at the moment.

“We've had estimates that Iran was a year away from nuke weapons for at least the last decade, “ he said. “They're always 12 months away and they come no closer.”

U.S. intelligence officials tell NBC News that Iran's nuclear activities have been stymied by the Stuxnet virus and other efforts, which have led to technical setbacks with Iranian centrifuge program, forcing Iran to slow its development process.

Addison Armstrong believes the concerns over Iran and Israel are “noise in the foreground,” for now. The real backdrop for the push in oil prices toward $100 will continue to be global economic issues and the increasing need for more government action.

“The fact that the economies around the globe are still struggling,” will prompt governments to take action, Armstrong said. “Without a doubt there’s going to be a shift in the West from austerity to stimulus.”

“Austerity just doesn’t appear to be the answer. These budgets need to grow.”

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