Oil Market Jittery Ahead of Key Week

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Win Thin

NEW YORK (BBH FX Strategy) -- How about that Axis of Evil? One could make the argument that Iraq and North Korea are out of play now, leaving only Iran as the sole remaining member.

Markets remain very nervous about the risks of an Israeli attack on Iranian nuclear facilities, with Intrade showing a 36% chance of such an attack by year-end. Although that's down from the high around 62% in mid-February, the odds are not insignificant and remain above the year-end odds around 22%.

President Obama will meet privately Monday with Israeli Prime Minister Benjamin Netanyahu. Ahead of that meeting, the two leaders nonetheless spent an evening hosted by the American Israel Public Affairs Committee, and comments that emerged give markets a somewhat clearer picture of how the dialogue may progress this week.

President Obama warned all options are on the table in terms of preventing Iran from developing nuclear weapons, but he urged that diplomacy must first be exhausted even as a premature military strike must be avoided. He also said that Israel has a sovereign right to make its own decisions, which Netanyahu said he appreciated.

Overall, this is a centrist approach from President Obama, but things are clearly complicated by the upcoming U.S. elections. On one hand, Obama is coming under attack from the Republican Party for not supporting Israel strongly enough. On the other, he has to wrestle with the potential impact of higher oil prices as tensions rise.

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Our view remains that the global economic outlook, while much improved from the fourth quarter of 2011, is simply not strong enough to withstand elevated oil prices for too long.

The U.S., eurozone, Japan and China are all net oil importers, very dependent on oil as a productive input. The Republican presidential candidates will address AIPAC via teleconference on Tuesday, so expect the rhetoric to remain heated.

West Texas Intermediate crude oil remains in a $105-$110 range, but any break above $110 would be very worrisome and could lead to a policy response, such as releasing oil from the Strategic Petroleum Reserve.

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