Oil Price

After the big pratfall from the summer '06 high of $78 bl.
oil bottomed near $50 in January and has rallied strongly since.
Yearend through late April - May is a strong seasonal period
for oil as refineries switch over production to gasoline. It
is also clear that the price weakness seen in late '06 and early
'07 likely led to rebuilding already significant coverstocks.
The recent run-up in price to the $65-66bl area has to be very
much a reflection of perceived supply risk owing to the new
presence of two full US battle groups in the Gulf and the
realization that the flag officer, Admiral Fallon, commands the
whole shebang, Iraq included. That plus the Iranian promise to
engage in "illegal acts" in retaliation for further UN sanctions
on its nuclear development program set the stage for a strong
rally when Iranian special forces illegally took 15 Brits into
custody recently.

Now short of some further ugly and draconian actions, the Iranians
have about milked the value of displaying the captives, and the
pit traders would have to be a little dumb to rally off old news.
But it appears this will be a pressure area for awhile, with the
Iranians having to be careful not to overplay their hand. The US
has the Iranians very tightly contained militarily, and further
sanctions may well, in cumulative fashion, put more economic
pressure on Iran, which is now nearly a basket case.

Oil is getting somewhat overbought, and is due for a rest, but
could still finish out its normal spring rally. The trend off
that $50 low when projected out is ominous, so capital markets
players will have to watch the action in the pits carefully to
make sure oil settles down soon.