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A major achievement in Iraq was overshadowed temporarily Turkish bombs over the weekend. The IEA reported that Iraq is now producing 2.3 million barrels a day which according to the Financial Times has outstripped pre-war levels for the first time.

The numbers show that Iraq is now producing 2.3 million barrels of oil is now up 1.9 million from the outbreak of war in 2003. Just last January Iraq’s production was pegged below 1.7 million barrels of oil a day during the dark days of the war. Why this sudden success? Well it is because the surge in Iraq is working. Just today Lt. General Ray Odiemo the second ranking US general says that violence in Iraq is at its lowest levels since the first year of the American invasion. In fact he said that the Violence last week was the lowest ever. This according to AP is opening the door a window for reconciliation among rival sects.

But sadly there are still some issues in that region On Sunday Turkish planes bombed northern Iraq targeting Kurdish rebels. This was the second operation this month...

AFP says that the rebel Kurdistan Workers' Party (PKK), which has waged a deadly insurgency in southeastern Turkey since 1984, maintains a network of rear-bases in the rugged Qandil Mountains near where the borders of Iraq, Iran and Turkey meet.

For oil traders the worry is the Northern Pipeline that has run as much as 300,000 to 400,000 barrels of precious crude a day but has been sporadic obviously if the tensions increase it could be cut off.

This comes at a time when Iraq’s oil industry is getting ready to boom and has been one of the major factors why oil pulled back from near record highs.

Progress in Iraq and the War on Terror is a bearish factor for oil.

Still in 2008 Because of the good news on the geopolitical front and a slowing economy there may not be a new record for oil in 2008. If you like records oil traders will have to live in the past. Year after year oil has made record highs but this year it not that likely. Every year since 2003 oil has broken the record high set the year before. This has been so common in this era of energy new that new highs every year for many traders are already just a given. Yet in the year ahead I doubt that the record high we establish 2007 will be broken in 2008 unless we get a real cold winter or some unusual geo-political event.

Now I know what some of you are thinking. That perhaps I am some kind of frustrated oil bear that is out of touch with market realities but let me tell you that is not the case. Even tough I am bearish in 2008 over that last few years there is hardly anyone out there that has more credible long term bullish credentials. Not only have I have been a long term bull throughout this entire decade, I was bullish before bullish was cool.

Being an oil bull these days is not a bold position to stake out but when I originally started to state the bull oil case it was not exactly a popular position to take. I was one of the first analysts that warned about the effect of China on the world commodity prices. How oil in late 1999 hit bottom and signaled a long term shift in the commodity cycle that that oil prices were going to move sharply higher. How higher oil prices were not signaling doom and gloom but really the improvement of the standards of living of people all over the globe. That high oil was a good thing that did not signal a recession but strong economic growth.

Last year in the year 2007 outlook I compared the run in crude oil to a sports dynasty and predicted correctly that oil would set a new high. I predicted oil would hit $85 in 2007 a position I was criticized for when oil dropped to $50. Of course not only did oil hit $85 but exceeded it. Now the same people who said we would never see $85 are so bullish it’s crazy talking like $110 $120 and beyond.

Yet this year I think that oil will not exceed the 2007 levels unless we get some type of event. (War, Hurricanes, etc) Oil is due for a breather in 2008 and why not, because it has been just one incredible run.

The reason that I feel that way is because the way the US credit crisis affected the price of oil and the outlook for demand. Demand is rising but not as strong as projected and a little known fact that daily world oil production in 2007 hit an all time high of 86.43 million barrels a day last October. Oil regardless flirted with $100 a barrel but it is unlikely we will see that level in 2008.

In fact I might contend that oil would have never got to the high nineties in 2007 if it were not for the fact that we had the credit crisis in the first place. Oil put on at least $10 a barrel after the Fed and their surprise 50 basis point rate cut in October. That tanked the dollar and propped up oil. Commodity funds bought oil and hedged the dollar with oil and the market soared. In other words the Fed basically tacked on an extra $10 a barrel in 2007. That 10 dollars the Fed added was the same $10 we would have gained in 2008 had it not been for Fed action.

You see speaking in rough numbers oil has been adding 10 a year even with all of the historic demand growth that we have had over the last few years. (Yes I know about peak oil etc.) But even with all the bullish arguments $10 was the number.

This year was no different until the Fed worked its rate cutting magic. When the Fed intervened we added $20. So the Fed because of their rate cutting probably gave us all of next years move in the last few months of 2007. Because we added an extra 10 dollars in 2008, we will be hard pressed to extend this market much higher.

Demand growth in 2008 will be questionable due to the crisis but production should rise. Less demand growth and more production probably means lower prices unless something bad happens. We will see a drag in demand due to economic problems but the bearish forecast is not all about bad news. It is also because the world looks to be a safer place in 2008.

The best part of my outlook for 2008 is the fact that geo-politically speaking the oil market in 2008 looks much safer than it has perhaps since the attacks of September 11, 2001.

In the 2007 outlook I wrote that "The market spent most of 2006 living in a state of fear that was sometimes real and sometimes imagined. It was a year of Geo-political tensions with Iran and war in Middle-East." This year many were convinced that we would see a war in Iran and that Iraq was going to be a lost cause. (Just ask Senator Surrender Harry Reid) Yet the surge in Iraq has worked and it should mean more oil production from an unexpected source Iraq. Iraq oil production is surging as I said before.

Al–Qaeda though still a threat took massive losses in Iraq. Despite there boasts that they would destroy oil facilities they have yet to stage a successful attack on oil. The market is less fearful of Al-Qaeda in 2008 than they have been in a very long time.

Iran drove oil higher on fear in 2007. They took British sailors hostage and released them and caused much fear and loathing in the oil market. Yet nothing has happened. US intelligence shows that Iran dropped its pursuit of a nuclear weapon temporarily lessening the risk for a war in 2008.

There are peace talks again with the Israelis and Palestinians. And North Korea gave up its nuclear weapons. Libya is allowing foreign investment and has given up on supporting terror. Venezuela’s Hugo Chavez lost his bid to be President for life and is losing popularity with his power base by spending his countries money to spread his political agenda. It looks like the Bush Doctrine is starting to pay dividends and we are winning the war on terror. For oil that should reduce the terror premium and we should see dividends as we move forward.

There is no doubt the year 2006 and will be remembered as a history making year energy. The record highs we saw in crude oil, gasoline and heating oil were the result of unprecedented challenges in the industry the likes of which we have never seen before. Whether is was the uncertain recovery from the sucker punch that Hurricane Katrina delivered or the ongoing volatile geo-political storm this was a year truly was unlike any other.

The market spent most of 2006 and 2007 living in a state of fear that was sometimes real and sometimes imagined. It was a time of Geo-political tensions with Iran and war in Middle-East.

It was a year that saw an abrupt phase out of the gasoline additive MTBE and tight supplies of the replacement additive ethanol and the move to ultra low sulfur diesel.

Yet the outlook for 2008 has changed for the better. This above all things is why we should be happy to start getting bearish on oil.

Phil Flynn is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.

Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn and Alaron Futures and Options have become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's accurate and animated forecasts, analysis, speculative and hedging opportunities.

Get daily research letters from Phil Flynn of Alaron Energies

Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.