Crude Inches Up on Iran Response

Updated from 11:53 a.m. EDT

Oil prices eked out a modest gain Tuesday after Iran said it was ready for "serious negotiations" with the West over its nuclear program, but stopped short of saying whether it would halt uranium enrichment.

Iran handed over its response to Western diplomats earlier today and offered a "new formula" to address the conflict, The Associated Press reported. No further details have been released.

Iran gave itself until today, a week before the U.N. deadline, to respond to a Western incentives package designed to persuade it to halt its nuclear program. But if Tehran refuses to halt uranium enrichment, the main requirement in the plan, the U.N. could slap sanctions on the world's fourth-largest crude producer.

The markets have expected Iran to reject the plan because they have refused U.N. inspections of an underground nuclear site and vowed to continue enriching uranium. On Monday, the country's Supreme Leader Ayatollah Ali Khamenei said Iran would not stop its nuclear program. After a two-year hiatus, Iran has restarted uranium enrichment, ostensibly for electricity generation. The West, however, believes it is a ruse for weapons development.

Traders have been on edge over Iran's next move because the country is the world's fourth-largest crude producer and has intimated that it may cut exports if hit with sanctions.

Light sweet crude with a September delivery date added 18 cents to close at $72.63 a barrel. The front-month expired today and helped inject more volatility into the market. Until the conflict with Iran is resolved, crude futures are likely to trade sideways as traders attempt to figure out whether global crude supplies will be affected.

Seesawing crude futures had a mixed effect on the rest of the energy sector. Wholesale gasoline rose 1 cent to $1.93 a gallon, and heating oil gained 1 cent to $2.03 a gallon.

A tropical depression moving west across the Atlantic was dropping rain on the Cape Verde islands. The storm had maximum sustained winds of 35 miles per hour and was expected to reach Bermuda within a week. The depression's speed is four miles per hour below the strength of a tropical storm. Still, the storm's existence propped up natural gas futures, which jumped 38 cents to settle to $7 per million British thermal units.

Elsewhere in the Middle East, the cease-fire in Lebanon was holding despite reported Israeli attacks on Hezbollah fighters yesterday. Iran also fired on and boarded a Romanian oil rig in the Persian Gulf, but did not give reasons why. The attack is the second on Grup Servicii Petroliere's rigs in the past week. The attacks were chalked up to a contractual dispute, Reuters reported.

Traders also were keeping an eye on the status of petroleum stockpiles due out in the U.S. Energy Department's weekly update on Wednesday. Crude inventories are expected to plunge by 1.3 million barrels, as refiners continue to produce more gasoline. Oil is refined into petroleum products, like gasoline and jet fuel.

The peak driving season, which ends Labor Day weekend, likely cut gasoline supplies by 2 million barrels last week as millions of Americans took to the roads on vacation. Gasoline consumption typically peaks during the summer.

Analysts polled by Bloomberg expect refining capacity to have remained the same at 91.5% last week. Distillates probably climbed by 700,000 barrels thanks to low demand and high production.

In market action, energy stocks were mixed, with the Amex Oil Index rising 0.2%, and the Philadelphia Oil Service Indices inching down 0.1%. Among drillers and refiners, Marathon Oil (MRO Quote - Cramer on MRO - Stock Picks), Valero Energy (VLO Quote - Cramer on VLO - Stock Picks) and Anadarko Petroleum (APC Quote - Cramer on APC - Stock Picks) were posting the largest increases, up about 1% each.

Repsol (REP Quote - Cramer on REP - Stock Picks), BP (BP Quote - Cramer on BP - Stock Picks), and Chevron (CVX Quote - Cramer on CVX - Stock Picks) were giving back the most ground, down from 0.5% to 0.8% each.