Oil prices climb as market eyes Iran sanctions

EU governments recently approved new sanctions against Iran, imposing additional financial and travel restrictions on a list of Iranian companies.

Ahmadinejad 224.88 (photo credit: AP)
Ahmadinejad 224.88
(photo credit: AP)
A faltering dollar, Mideast tensions and concerns over supply disruptions out of Nigeria propelled oil prices above US$138 a barrel Tuesday, less than US$2 away from crude's trading record. The crude futures market was also showing disappointment over Saudi Arabia's modest production increase announced Sunday at a meeting of oil producing and consuming nations. The kingdom said it would pump more crude oil this year if the market needs it, but its pledge fell far short of US hopes for a larger increase. Light, sweet crude for August delivery rose US$1.38 to US$138.10 a barrel by noon in European electronic trading on the New York Mercantile Exchange. The contract rose US$1.38 to settle at US$136.74 a barrel Monday. The increase put crude within striking distance of its trading record of US$139.89 established last week. Prices increased as the US dollar weakened - in morning European trading, the euro bought US$1.55, up from US$1.54 the night before in New York and other major currencies also gained on the dollar. When the dollar loses ground, investors tend to buy oil and other commodities seen as a hedge against inflation. Many analysts believe the dollar's protracted decline has been one of the main reasons oil has nearly doubled in value over the past year. Investors were also closely watching developments in Nigeria. Royal Dutch Shell PLC has said it cannot meet contractual obligations to export oil from a Nigerian oil field following a militant attack, and news reports say Chevron Corp. has been forced to shut down a Nigerian oil facility, also after a militant attack. Chevron's workers in Nigeria also reportedly walked off the job Monday after talks with the company over staffing levels broke down. "Markets are still concerned about oil supply, particularly after disruptions last week in Nigeria," said David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney. The production outages in Nigeria appeared to overshadow a cease-fire declaration by the Movement for the Emancipation of the Niger Delta, or MEND, the largest militant group in Nigeria. Attacks by MEND have cut about one quarter from Nigeria's normal daily oil output, helping buoy crude prices. EU governments approved new sanctions Monday against Iran, imposing additional financial and travel restrictions on a list of Iranian companies and experts - including the country's largest bank. The 27-nation bloc stopped short of banning oil and gas exports from Iran, OPEC's second-largest producer, in response to its nuclear program plans. With upward pressure predominating, "the Saudi hike in output that they announced on Sunday is not enough to cause prices to come down," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. Saudi Arabia said it would add 200,000 barrels per day in July to a 300,000 barrel per day production increase it first announced in May, raising total daily output to 9.7 million barrels. "There's a broader review, in the market, of whether the increase in Saudi output will be sufficient to meet the ongoing demand for oil, particularly from developing economies," Moore said. In the US, Democratic members of Congress said Monday they intend to tighten investment restrictions on pension funds, investment banks and other large investors that they blame for driving up fuel prices. Investors have increasingly pumped money into contracts for oil and other commodities as a hedge against inflation when the dollar falls. Vienna's JBC Energy, in its daily market report, noted that skyrocketing prices at the pump apparently were having an effect on US driving habits, citing US Department of Transportation reports showing a 2.1 percentage point decrease in driving from January through April, year on. Looking at gasoline demand for the whole year, JBC predicted a 1.7 percent drop compared to 2007. Analysts said the oil market was also supported by tight fundamentals. "It's not just speculators or just fundamentals," Shum said. "Global oil markets are at this time structurally tight, meaning demand keeps growing and supply is playing catch-up with demand. That has attracted speculators into oil." In other Nymex trading, heating oil futures added nearly 5 cents to US$3.8460 a gallon (3.8 liters) while gasoline prices rose by almost 4 cents to US$3.4936 a gallon. Natural gas futures added close to 5 cents to US$13.250 per 1,000 cubic feet. Brent crude futures rose US$1.23 to US$137.14 a barrel on the ICE Futures exchange in London.