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Iran and the Price of Oil

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As tensions mount in the Middle East, where will oil go?

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Around the world, investment strategists argue, there are rogue regimes threatening to upend our global economy. Chief among them: the Mullahs in Tehran.

Tensions with the Iranian regime have stepped up over the past week, kicking off with the latest report on Iran's nuclear program by the International Atomic Energy Agency (IAEA), which expressed concern that the Iranian regime might be working on nuclear weapons despite its denials.

The UN nuclear watchdog charged: "Altogether, this raises concerns about the possible existence in Iran of past or current undisclosed activities related to the development of a nuclear payload for a missile. These alleged activities consist of a number of projects and sub-projects, covering nuclear and missile related aspects, run by military related organizations."

Over the weekend, Tehran hit back: Iran's supreme leader Ayatollah Ali Khamenei said that the US and its allies were behind the IAEA report. (The IAEA is scheduled to meet later this week to discuss Iran's refusal to accept international demands to halt enrichment of uranium, says the AP).

If Israel was ever going to attack Iran, writes Dr. Ed Yardeni of Yardeni Research, now might be a very good time.

The market pro today points to a story in the New York Times detailing the puzzling decision by Iran to move its entire stockpile of low-enriched nuclear fuel to an above-ground plant.

"It was as if, one official noted, a bull's-eye had been painted on it," notes the Times.

The price of a barrel of crude oil was at $83.18 near the start of the year. It dropped to $71.19 on February 5. On Friday, it closed at $78.17.

Yardeni advises investors to keep a careful watch on the conflict with Iran, given its potential significant consequence for the oil market over the rest of the year. (He continues to recommend overweighting S&P 400 (Midcap) Energy).

The Energy Select Sector SPDR (XLE), which includes holdings like Chevron (CVX), ConocoPhillips (COP), and Occidental Petroleum (OXY) is down 0.75% year-to-date, but is up 37% in the past 12 months.

For more on tensions with Iran, and what it means for the price of oil, we checked in this morning with energy analysts, including Michael Lynch of Strategic Energy & Economic Research, who argues that all this tension with Iran is moderately bullish for the black gold.

"Every time there is another aggressive speech out of Iran, or comment from Israel, there is a bump in the price of oil," Lynch says. "And nobody sees a resolution to this anytime soon."

However, Lynch argues, short of an unusual and unexpected event -- such as Israel attacking Iran -- the price of oil is about as high right now as it's going to get this year.

"The fundamentals are usually a bit weaker in the second quarter: The heating season is almost over and refineries go into maintenance," he says. "And we're still getting mixed signals from the economy."

Stephen Schork, editor of The Schork Report, argues that the fundamentals don't support oil at these levels.

"Oil is too expensive," he tells Minyanville. "Look, the oil companies can't make money at $70 per barrel, let alone at $80. Exxon (XOM) lost $3.5 million per day in the fourth quarter."

However, Schork is quick to point out that this doesn't mean that the price of oil nose-dives.

"The speculator is a force in this market," he says, adding, "The number-one axiom taught to us by Lord Keynes is this: Markets can remain irrational longer than you can remain solvent. This market is irrational, but it can become even more irrational. This is fire. I'm not playing with it."

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