Iran Standoff Plagues Oil Prices

Lower than expected declines in U.S. oil inventories momentarily depressed crude oil prices during morning trading on Wednesday, but prices swiftly rebounded amid lingering concerns over Iran's row with the U.K.

According to a federal report released by the Energy Informational Administration late Wednesday morning, gasoline supplies fell by 300,000 barrels last week--a much smaller decline than the 1.8 million drop expected by Wall Street. Distillate fuel supplies, such as diesel fuel and heating oil, fell by 700,000 barrels, below analysts' expectation of 800,000 barrels.

Soon after the report, crude oil dipped below $64. The drop was quickly erased, and at the close of trading, crude oil on the New York Mercantile Exchange was back up 1.8% to $64.10.

The mounting tension between Iran and the United Kingdom over the seizure of British naval personnel drove crude oil prices near $65 a barrel during morning trading on Wednesday, breaching levels not seen since September.

As an illustration of just how skittish the international markets are over a possible military showdown, oil prices jumped $5, to $68 a barrel, in after-hours trading on Tuesday amid false rumors that Iran had fired a missile on a U.S. ship in the Persian Gulf. Prices quickly settled back, but strong British rhetoric kept prices well above the Tuesday close.

In a six-day face-off, the U.K. has sparred with Iran over the release of its personnel, who had boarded an Indian-flagged ship in what London insists were Iraqi waters. Iran, by contrast, claims the British sailors and marines had strayed into its territory.

Investors are concerned that oil supplies could be jeopardized if Western powers became embroiled in a military dispute with Iran, one of the world's largest oil exporters. On Wednesday, Britain froze all diplomatic ties that did not relate to the negotiations. In a plea to Iran, U.K's Ministry of Defense also released evidence that its sailors were 1.7 nautical miles inside Iraqi waters at the time of their capture. Iran refuted the claim and said the British were half a nautical kilometer (0.3 mile) inside Iran's waters.

Calling Iran's seizure "completely illegal," Prime Minister Tony Blair told the British Parliament on Wednesday that it was "now time to ratchet up the pressure." Over the last few days, Blair has been less pointed in his remarks and only ambiguously indicated that the country would enter a "different phase" if negotiations stalled. On Wednesday, Iranian officials aired a videotape of the prisoners and announced one woman captive would be released Wednesday or Thursday.

"They were very friendly and very hospitable, very thoughtful, nice people. They explained to us why we've been arrested. There was no harm, no aggression," the female prisoner, Faye Turney said in the video. But British officials fumed over the tape late Wednesday, calling it a violation of the Geneva convention because it inappropriately displayed foreign prisoners.

The dispute comes as Iran faces increased pressure from the international community on other fronts. On Sunday, for example, the United Nations ordered Iran to halt its uranium-enrichment program in 60 days. On Tuesday, in a display of gunboat diplomacy, the United States kicked off a major military training operation in the Persian Gulf. The exercise, featuring 15 warships and 100 aircraft, was the largest showcase of U.S. military might since the Iraq invasion in 2003.

source:www.forbes.com