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Iran Tension Lifts Oil Prices

July crude ramps above $73 a barrel.

Updated from 12:05 p.m. EDT

Oil prices rose Monday after Iran, the world's fourth-largest crude producer, threatened to cut global oil supplies if the U.S. threatened its nuclear program.

Light, sweet crude closed up 27 cents to a fresh three-week high of $72.60 a barrel. On Friday, oil prices settled at $72.33 after Iran said it won't halt nuclear development.

Iran controls the Strait of Hormuz, a narrow waterway through which 17 million barrels of crude, or about 20% of the world's supply, travel every day.

"If you make any mistake, definitely shipment of energy from this region will be seriously jeopardized," Iran's supreme leader, Ayatollah Ali Khmanei, said Sunday in a state radio address, the

Associated Press


Khamenei did not elaborate on how Iran would disrupt oil inventories, but his comments were enough to put traders on edge and send energy prices soaring in early trading.

But U.S. Secretary of State Condoleezza Rice dismissed Iranian threats, saying the country is dependent on oil revenue. In 2004, Iran earned $31.5 billion from crude, about 80% of its budget, and is expected to make $55 billion this year,



Meanwhile, the European Union's foreign policy leader, Javier Solana, is set to meet with Iranian officials on Tuesday to present an incentives package designed to persuade Iran to halt its nuclear program. The contents of the proposal are unknown, but there are reports it may include a light-water nuclear reactor and trade incentives.

Oil prices have skyrocketed 20% this year as the impasse with Iran over its uranium enrichment has heated up. In February, Iran restarted enriching uranium after a two-year hiatus in defiance of Western threats of economic sanctions and rumors of military strikes. The impasse with Iran was in the fore last week after the U.S. offered to join negotiations with Iran to better hammer out a solution.

Slim margins of supply --- the world consumes 85 million barrels of crude per day -- and little excess capacity have lent support to high energy prices. Crude exports are down, reflecting the war in Iraq, rebel attacks in Nigeria and Venezuelan President Hugo Chavez's push to extract more oil money from many of the world's largest oil companies, like


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In Nigeria, rebels have attacked the country's oil industry, kidnapping workers and blowing up oil pipelines and facilities, to pressure the government into giving them a share of Nigeria's petrodollars. As much as a quarter of the country's output has been lost to the attacks. Unknown gunmen released eight foreign oil workers on Sunday they had kidnapped from an offshore rig operated by the Norwegian company Fred.Olsen Energy. It was the fourth kidnapping this year.

OPEC, which accounts for 40% of the world's crude, has been pumping flat-out to meet demand, though production cuts have reduced those volumes. Saudi Arabian oil minister, Ali Naimi, told the

Wall Street Journal

the group's members have had problems finding enough buyers and the kingdom had reduced output to account for lower demand. In April, the kingdom pumped 9.1 million barrels of crude per day, down from 9.5 million barrels during the first quarter.

The hurricane season, which began last Monday, and peak demand for gasoline during the summer, when millions of Americans take to the roads, will likely keep energy prices high. Nine months after hurricanes Katrina and Rita roared through the Gulf of Mexico and shut down most of the region's oil industry, 22% of the area's oil production remains closed. As much as 10% of that amount may never reopen, some analysts have suggested.

Weather forecasters expect this year's hurricane season, which runs from June 1 to Nov. 30, to be "above normal," with 13 to 16 named storms and eight to 10 hurricanes. At least four of them will be hurricanes of Category 3 strength or higher, according to the National Oceanic and Atmospheric Administration.

The forecast falls short of last year, when there were 28 storms, 15 of which became hurricanes. Two of those, Katrina and Rita, destroyed or damaged pipelines and offshore platforms and drove crude prices to record highs.

Some analysts believe, however, that oil prices won't be that affected by hurricanes this year.

"Even though an active hurricane season could cause regional shortages in gasoline and other refined products, any run-up in crude oil prices would likely be short-lived," Marshall Adkins and John Freeman, energy analysts at Raymond James in Houston wrote in a weekly client note. "The effects of oil supply disruptions should be mitigated by bigger potential outages in refining capacity, the opening of the Strategic Petroleum Reserve, and the global fungibility of crude."

The rally in crude prices had mixed effects on the rest of the energy complex, with gasoline settling down 3 cents at $2.16 a gallon and heating oil climbing 3 cents to $2.04 a gallon.

A supply glut drove down natural gas prices by 16 cents to $6.46 per million British thermal units. Inventories are up 27% over last year and 46% above the five-year average.

Energy shares on the Amex Oil Index and the Philadelphia Oil Service Index were falling 3%. Among oil drillers,


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Valero Energy

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were leading the declines, down about 3% each.


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National Oilwell Varco

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Rowan Companies


were posting the largest decreases among oil service companies, from 3% to 4%.