Oil Rises as Iran Says U.S. Action May Disrupt Gulf Shipments

June 5 (Bloomberg) — Crude oil rose to the highest in more than three weeks after Iran said any U.S. action against its nuclear facilities risked disrupting shipments of crude from the Persian Gulf, which supplies about 20 percent of the world’s oil.

The U.S. could “seriously endanger energy flow in the region” by acting against Iran, Ayatollah Ali Khamenei, the country’s supreme leader, said yesterday. Iran, which pumps 3.85 million barrels a day, controls the eastern shore of the Strait of Hormuz, a waterway through which flows about 17 million barrels a day from the Gulf region.

“This isn’t suggesting that they are going to cut off their own supplies,” said Chris Tinker, head of equity research at ICAP Plc. “There is a potential threat to disrupt the Strait of Hormuz, which obviously will influence other producers in the region. The Iranians are playing hardball.”

Crude oil for July delivery rose as much as $1.51, or 2.1 percent, to $73.84 a barrel on the New York Mercantile Exchange, its highest intraday price since May 11. Prices were $73.50 at 11:56 a.m. London time.

Brent for July rose $1.36, or 1.9 percent, to $72.39 a barrel on London’s ICE Futures exchange.

Oil has gained 21 percent this year in New York on concern exports may be cut by Iran and in Nigeria, where militants have attacked facilities and kidnapped workers. Prices climbed 2.8 percent June 2 after an assault on a Nigerian oil rig heightened concern supplies would fall short of demand this summer in the U.S.

Futures touched $75.35 on April 21 and April 24, the highest since trading began in 1983.

Iranian Incentives

Iran’s Khamenei didn’t say what steps Iran might take to counter U.S. action. Last week, the U.S., China, Russia, the U.K., France and Germany offered Iran incentives to abandon any nuclear weapons development. The Islamic nation must respond to the offer “within weeks,” U.S. Secretary of State Condoleezza Rice said.

At its narrowest, the Strait of Hormuz consists of two-mile- wide channels for inbound and outbound tanker traffic and a two- mile-wide buffer zone. Closing the Strait would force tankers to take longer, alternative routes and raise transportation costs.

“We continue to have a very tight supply-demand balance, so if Iran were to do anything, it would definitely disrupt the market,” said Kurt Barrow, an analyst at the energy consultant Purvin & Gertz Inc. in Singapore.

Iran, holder of the world’s second-largest oil and natural gas reserves, has repeatedly threatened retaliation if the U.S. takes military action or the United Nations imposes sanctions. Iran’ Navy test-fired its fastest torpedo during war games in the Persian Gulf in April.

Revenue Needed

Rice said the Persian Gulf country needs the oil sales. “We shouldn’t put too much emphasis on a threat of this kind,” she said yesterday on the “Fox News Sunday” program. “After all, Iran is also very dependent on oil revenue.”

The U.S. contends Iran is trying to develop nuclear weapons. Iran says it wants nuclear plants to produce electricity.

Iran gets 80 percent of its export revenue from crude oil. It made $31.5 billion in 2004. Revenue will rise 23 percent to $55 billion this year as oil prices climb, Hadi Nejad-Hosseinian, Iran’s deputy oil minister for international affairs, said May 17.

Saudi Arabia’s crude oil output fell to 9.1 million barrels a day in April because of weaker demand, not because it wants to limit supply, the Wall Street Journal reported, citing the Saudi oil minister, Ali al-Naimi. Saudi output averaged almost 9.5 million barrels a day in the first quarter, according to the International Energy Agency.

Oil “price is being driven by bottlenecks in downstream. Refining capacity is limited,” said Edmund Daukoru, president of the Organization of Petroleum Exporting Countries and Nigeria’s oil minister. “Spare capacity is just not believed by the market.”

Decline Predicted

Oil was forecast to fall this week by a Bloomberg News survey of 32 analysts, traders and brokers. Fourteen of them, 44 percent, said prices would drop on signs the U.S. can meet summer gasoline demand.

U.S. gasoline use peaks between Memorial Day in late May and Labor Day in early September. Supplies have risen 4.3 percent since April 21 as refinery output reached its highest since August, before Hurricane Katrina, the U.S. Energy Department said last week.

Gasoline for July delivery rose as much as 3.75 cents, or 1.8 percent, to $2.235 a gallon in after-hours trading in New York.

The average U.S. pump price of regular gasoline fell 2 percent in the past month to $2.859 a gallon on June 4, according to the American Automobile Association, the nation’s largest motoring club.

Hurricane Season

Five hurricanes as powerful as last year’s Hurricane Katrina when it made landfall are likely to form in the Atlantic this year, and there’s an 82 percent chance at least one will hit the U.S., forecasters at Colorado State University said last week. U.S. oil output is still about 22 percent less than it was before the hurricanes, the U.S. Minerals Management Service said May 3.

The Atlantic storm season runs from June 1 through Nov. 30.

“If another couple of storms come through, especially early, you could see a very big impact that’s almost unknow-able,” said Andrew Harrington, an industrial analyst at Australia & New Zealand Bank Group Ltd. in Sydney. “There’s going to be a fairly high floor on prices just because of that.”

In Nigeria, kidnappers yesterday released eight foreign oil workers they took hostage two days earlier in the Niger River delta. The incident was the fourth kidnapping of foreign oil workers this year in Nigeria, Africa’s top oil producer.

The Organization of Petroleum Exporting Countries decided June 2 to keep production quotas at a record high of 28 million barrels a day to help meet demand.

To contact the reporter on this story:
Eduard Gismatullin in London at
egismatullin@bloomberg.net

Last Updated: June 5, 2006 07:20 EDT

Bloomberg