07/03/2012 09:36 EDT | Updated 09/02/2012 05:12 EDT

Benchmark crude prices jump on fears of renewed tensions with Iran

NEW YORK, N.Y. - Renewed tensions between Iran and the West pushed oil its highest level in more than a month.

Iran is again threatening to block a critical Persian Gulf shipping route in response to a European embargo of Iranian oil. Iran has sparred for months with the West over its nuclear program.

Benchmark U.S. crude added US$3.91, or 4.7 per cent, to end at $87.66 per barrel in New York. That's the highest price since May 30.

Brent crude, which sets the price of oil imported into the United States, rose above $100 for the first time in three weeks. Brent added $3.34, or 3.4 per cent, to finish at $100.68 per barrel in London.

Combined with a big gain on Friday, oil has risen by nearly $10 per barrel in less than a week. That's bringing an end to a prolonged drop in pump prices. The U.S. average for gas rose slightly Tuesday to $3.30 per gallon, the first increase in more than two months.

An increase in U.S. factory orders from April to May also supported oil prices on Tuesday. And analysts are betting that Europe, China and the U.S. will take steps to stimulate their economies, which would boost oil demand.

But the main driver was Iran. More than a third of the world's seaborne oil is shipped out of the Persian Gulf, so any move by Iran to shut the vital Strait of Hormuz raises the risk of a confrontation and the disruption of tanker traffic. Iran has threatened to block the waterway since late last year when Western nations imposed financial sanctions and the European Union first proposed an oil embargo.

The dispute is over Iran's nuclear program. The West says Iran is enriching uranium to eventually build nuclear weapons. Iran denies the claim.

Iran said Tuesday that it test-fired several ballistic missiles, including a long-range variety meant to dissuade an attack by Israel or the U.S. The New York Times reported that the U.S. has sent military reinforcements into the Persian Gulf to deter the Iranian military from any possible attempt to block the vital waterway.

Iran's earlier sabre-rattling helped boost U.S. oil above $110 per barrel and Brent above $125 in early March. But oil dropped 25 per cent drop from May 1 to June 28 as Iran decided to engage in negotiations, the European financial crisis worsened and growth slowed in the U.S. and China.

Now, with negotiations showing no progress and the European embargo in effect as of Sunday, investors are once again bracing for a response from Iran.

"The concern isn't that Iran might sink a ship," said Michael Lynch, president of Strategic Energy & Economic Research. "It's for a longer conflict that will keep insurers wanting to stay away from the Gulf, which would cause a disruption of shipping that could last a few weeks. That's a major disruption of the world's oil."

Wholesale gasoline futures added 9.9 cents to finish at $2.7229 per gallon. Wholesale gas has risen about three per cent in the past week.

In other futures trading, heating oil added 8.26 cents to end at $2.7585 per gallon while natural gas rose by 7.5 cents to finish at $2.899 per 1,000 cubic feet.


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