The market showed is weakness when oil rose $3 on news that a US ship had fired warning shots at Iranian boats.  Investors are worried that a new war with Iran may disrupt supply and drive the price up even higher,  Oil closed up $2.46 to $118.52 per barrel.  Military action is disliked by traders who fear a weakening US dollar and supply troubles.

The rise in prices was due to a possibility of supply loss, not an actual decline in supply.  This tells us that if a supply drop would occur, prices would be likely to rise by $5 to $10 just on news.  Who knows how much past that, when the numbers are finally released.  Oil prices are very sensitive to a small disruption in supply, all of the worlds oil is purchased almost as soon as its produced.  Thus there is little room for comfort in a serious supply squeeze.

Oil prices have started affecting the commercial sector.  FedEx and UPS are positing lower earnings due to high fuel costs, foreign manufacturers spend more and more to import/export goods, airlines lost $10 Billion mostly from fuel.  As the price of oil makes its way down the chain, the end consumer is starting to pay higher and higher prices for almost anything.  Gas alone is $3.69, cutting heavily into the pocketbooks of American Citizens.

Relief is out of sight for now.  The economic stimulus package promises more inflation and a weaker dollar, eventually raising the price for commodities such as oil.  Fed plans to boost the lending industry have also pumped hundreds of billions in fresh credit to the market.  Oil prices have no where to go but up, usage will not fall but instead increase as the summer driving season heats up.

At this point its time to pay very careful attention to the price of oil.  Manage your portfolio around those companies that are the least negatively exposed to oil, it’s a terrible time to be holding a transportation company but a great time to own a refinery.