Oil Prices: Three Factors to Watch this Week


"There are a few catalysts that could propel energy higher this week, thanks to the quest to save the Eurozone, the FOMC meeting and Iran's moves to choke the Strait of Hormuz."

Oil prices took a break today (Monday) from their four-day streak of gains. Crude for September delivery ended 35 cents lower, or 0.4%, to $89.78 a barrel on the New York Mercantile Exchange.

But there are a few catalysts that could propel energy higher this week.

The recent resurgence in oil prices—up about 14% in the past month—has trickled to prices at the pump, too.

For the third consecutive week last week, the Energy Information Administration (EIA) reported the U.S. average retail price of regular gasoline jumped seven cents to $3.49 a gallon. The national average diesel fuel price increased nine cents to $3.78 per gallon.

Money Morning Global Energy Strategist Dr. Kent Moors warned a few weeks back of this expected oil price climb. He said "the gasoline and oil markets have certainly been oversold and remain so to this day," adding that "the rebound is likely to be greater there than in the energy sector as a whole."

It appears that rebound has started. Here are three factors that could fuel the oil price climb this week.

What's Boosting Oil Prices

#1: The Quest to Save the Eurozone
European Central Bank (ECB) President Mario Draghi promised last week he will do "whatever it takes" to contain the Eurozone debt crisis.

Draghi's comment that whatever is done "will be enough" triggered a global stock market rally.

Echoing Draghi's comments over the weekend were German Chancellor Angela Merkel and Italian Premier Mario Monti who pledged to do "everything" to save the euro.

The words sent an optimistic message that the region will avert a recession. Investors interpreted the comment as a signal the ECB is ready to monetize the ailing Eurozone region with bond purchases.

We'll see how well Europe does with these promises, but for now the leaders' support was enough to move oil higher on hopes that a global slowdown can be avoided and oil demand will increase.

#2: The FOMC Meeting
Investors anticipate that U.S. Federal Reserve Chairman Ben Bernanke & Co. will announce a third round of quantitative easing, or at the very least hint that it remains on the table, when it concludes its two-day Federal Open Market Committee (FOMC) meeting Wednesday.

The wave of gloomy economic data that has flooded markets lately indicates QE3 should set sail sooner than later. Friday's glum report on U.S. gross domestic product (GDP), the broadest measure of goods and services churned out by the economy, showed growth slowed sharply in the second quarter from the first.

The report added to other fresh signals that the Federal Reserve must move quickly to spur growth. The Fed's aim is to get banks to start lending and to get consumers and business to start spending. QE3 could accomplish that.

It could also buoy investors to bid up stocks and other risky assets (oil, gold, silver), which would expectantly boost consumer and business confidence, encouraging them to spend and hire more.

That's why QE3 is bullish for oil prices.

#3: Iran Moves to Choke Strait of Hormuz
Also garnering attention is news that Iran is moving closer to closing the Strait of Hormuz, the strategic shipping route the EIA calls "the world's most important oil chokepoint."

The Iranian parliament is mulling a bill that threatens to close the Strait to oil tankers from countries that support sanctions imposed on Iran over its nuclear program. Reports are that more than half of Iranian parliament members have signed off on the bill.

The implications from such a move on oil, which would dramatically squeeze supply, could cause a huge spike in crude prices. Last year, some 17 million barrels a day of oil, or 20% of the world's traded oil and 35% of all seaborne-traded oil, passed through the Strait.

Just the rumor, or a threat from Iran to close the Strait, can move oil prices.

Diane Alter
Money Morning

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