Crude prices were down at midday following President Bush's speech this morning regarding the Israeli-Palestinian crisis. After trading as high as $28.35 per barrel early on, crude futures were lately down 2.9% at $26.75.

Bush's call for Israel to withdraw its forces from the West Bank and his decision to dispatch Secretary of State Colin Powell to the Middle East to help negotiate an end to the conflict helped calm oil markets. So did newswire reports that Kuwait's defense minister said his country "cannot think of using

oil as a weapon," a reference to calls from some elements within OPEC to consider an embargo or cutting back of supplies.

The apparent amelioration of tensions in the crude markets helped U.S. stocks rally early, although major indices were in modestly negative territory at midday.

But oil industry observers remain very wary of the political situation.

"The President taking an initiative was critical to not having

the conflict between Israel and Palestine devolve further," said Tom Petrie, CEO of energy investment bank and research firm Petrie Parkman. "But it may devolve further as people interested in promoting terrorism don't want anything other than the destruction of the state of Israel."

Furthermore, the President's harsh rebuke of Yasser Arafat -- Bush called him "a betrayer of the hopes of his people" for his refusal or inability to reject terrorism -- and tough comments about Syria and Iraq will "incense the people in the

Arab streets," Petrie said. "I think

Bush had to say what he said, but it isn't going to be pretty. The situation is going to be very stressful for an extended period."

Peterie reiterated what he told my colleague

Justin Lahart: That the past several weeks have us on the precipice of the worst crises in the Middle East since 1973, when there was all-out warfare between Israel and its Arab neighbors.

Echoing the comments of

New York Times

columnist Thomas Friedman, Petrie declared: "This is a challenge for civilization as we know it because the nature of weapons has migrated from stones to dirty nuclear bombs." Sept. 11 tragically demonstrated how the nature of warfare has changed as well.

That said, the analyst claimed with no hint of irony or sarcasm that he is "more sanguine about the price of oil than I am about the future of civilization."

As the comments from the Kuwaiti official indicate, major oil producers understand "the worst they can do is overreach on price," he said. He forecast that oil will likely stay in the $20 range, but that if it exceeds $30, "higher oil prices will beget lower prices."

Of course, that is barring some calamitous development in the Middle East, fears of which -- rather than industry fundamentals -- have driven the recent spike in oil prices, according to Fadel Gheit, oil analyst at Fahnestock.

"The fundamentals we are trained to look at suggest potential weakness in oil and natural gas prices," Gheit said. He believes recent gains for oil and related shares will prove fleeting. As crude prices retreated, the Amex Oil & Gas Index was down 2.5% at midday while the Philadelphia Stock Exchange Oil & Gas Index was off 2.3%.

"Fundamentals don't suggest oil prices will rise, but I can't help it when the President says 'Axis of Evil' in the State of the Union address," he said. "Obviously, the escalation of violence and continued threats against Saddam Hussein and the Iranians has complicated things."

While acknowledging that Bush inherited a difficult situation without easy solutions, Gheit was critical of the President's policies and tactics.

Today's speech is "too little too late for him to save his standing in the Middle East," where the overriding opinion is "U.S. policy is totally one-sided," Gheit said. Meanwhile, "the market is afraid Bush is inexperienced and this thing is getting out of control and he keeps repeating 'I'm going after Saddam Hussein' without giving a compelling reason."

Another Line in the Sand?

Rather than being a statesman, Bush seems to have a personal vendetta against Hussein, the analyst fretted, which could be the case given his father's history with the Iraqi dictator.

"A lot of people want to see Saddam go, but you're risking a lot of other interests to get this one almost personal goal," Gheit said. "It's beginning to be childish."

These are inflammatory comments, obviously, and Gheit stressed he's not "anti-Bush." But by threatening Hussein personally, Bush has the energy markets spooked that our longtime nemesis will attempt to disrupt the flow of oil in Saudi Arabia or Kuwait, or launch terrorist attacks against the U.S.

"If we take the fight to Saddam Hussein, he's going to resort to the dirtiest, meanest, lowest

tricks of any thug we've encountered," Gheit predicted.

Furthermore, the analyst worried that a post-Saddam Iraq would splinter along ethnic lines -- Sunni, Shiite, and Kurdish -- and turn into a "mini-Balkans" that threatens to draw neighbors such as Turkey and Iran into the fray.

As with Afghanistan, he said the Bush administration has proposed "no exit strategy" for its presumptive battle with Iraq -- much less the other two-thirds of the "Axis of Evil."

The concern is that today's apparent calm could prove to be the eye of a very large and powerful hurricane.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.