Meanwhile, the U.S. navy warned that any disruption of traffic through the vital Strait of Hormuz "will not be tolerated."
In New York benchmark West Texas Intermediate crude fell $1.98 to finish at US$99.36 a barrel. Brent crude, used to price may oil varieties imported by U.S. refineries, fell $1.71 to end at US$107.56 a barrel in London.
On Tuesday, Iran's vice-president said that his country was ready to close the Strait of Hormuz — a vital waterway through which a third of the world's tanker traffic flows — if western countries embargo Iranian oil because of Tehran's ongoing nuclear program.
The head of the Iranian navy added on Wednesday that his fleet can block the strait if need be. His comments came as Iran held a 10-day drill in international waters near the strategic route, which is less than 34 kilometres wide at its narrowest point.
A Saudi oil ministry official told The Associated Press that Saudi Arabia and other Gulf producers are ready to provide more oil if Iran tries to block the strait. The official spoke on condition of anonymity because he was not authorized to discuss the issue. He didn't specify other routes that could be used to transport oil, although they would likely be longer and more expensive for getting crude to the region's customers.
"Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated," said Lt. Rebecca Rebarich, a spokeswoman for the U.S. navy's Fifth Fleet, which is responsible for naval operations in the Persian Gulf, the Red Sea and the Arabian Sea.
Some analysts think the Iranian threats are more rhetoric than reality. "We doubt political posturing will turn into action," energy consultant and trader Stephen Schork said in a report.
"Shutting down the strait ... is the last bullet that Iran has and therefore we have to express some doubt that they would do this and at the same time lose their support from China and Russia," said analyst Olivier Jakob of Petromatrix in Switzerland.
Iran is the fourth-largest oil exporter in the world, according to the Energy Department. Most of its crude goes to Asia, with China its biggest customer. Oil provides half of Iran's revenue. Last year that amounted to about $73 billion.
Oil prices were also undercut on Wednesday by persistent worries about Europe and future demand for oil as the region's economy weakens. The European Central Bank said the Continent's banks parked a record US$590.72 billion overnight with the ECB, reflecting distrust in the European banking system.
In other energy futures trading, heating oil fell two cents to finish at US$2.89 a U.S. gallon (3.79 litres), gasoline fell four cents to end at US$2.65 a gallon and natural gas fell three cents to finish the day at US$3.08 per 1,000 cubic feet.
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