Oil spikes on Iran rumours, on eve of OPEC meeting

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Oil spiked Tuesday as the market got caught up in rumours about Iranian military exercises in the key Gulf route and hoped for more stimulus measures from the US Federal Reserve, traders said.

In afternoon deals, the price of Brent North Sea crude for delivery in January surged to $111.10 per barrel, before pulling back to $109.32, which was still a hefty gain of $2.06 from Monday's closing level.

New York's main contract, light sweet crude for January, leapt as high as $101.25. It later stood at $99.70, up $1.93 from Monday.

"Oil prices jumped sharply in the afternoon session on reports of Iranian military exercises in the Strait of Hormuz, which was later denied by an Iranian foreign ministry spokesman," said CMC Markets analyst Michael Hewson.

Traders remain fearful that Tehran could try and block the strategically-sensitive Strait of Hormuz that links the Gulf with the Gulf of Oman and through which much of the region's oil is transported.

"It shows how sensitive the oil market is when a rumour of Iran's intention of closing the Strait of Hormuz on a whim cause the price to spike," said broker Owen Ireland at Valbury Capital.

"Whether or not the rumour is true ... remains to be seen but it is important to consider how much power Iran has over the black stuff."

A US drone captured by Iran is now the property of the Islamic republic, Iran's Defence Minister Ahmad Vahidi said Tuesday, dismissing a request by US President Barack Obama for its return to stoke tensions between the two.

Iran last week displayed on state television what it said was the drone. A lawmaker said the Islamic republic was unlocking the aircraft's software and was going to reverse-engineer the drone.

The incident came after Britain, Canada and the United States last month slapped increased sanctions on Iran's financial, petrochemical and energy sectors after a UN report that strongly suggested Tehran was researching nuclear weapons. Tehran has dismissed the UN report as baseless.

"It looks like geopolitical tensions are ratcheting up fast," noted GFT analyst David Morrison.

Later on Tuesday, the US Federal Reserve is later expected to keep interest rates near zero -- where they have now been for three years -- as it searches for other tools to boost the economy.

OPEC, meanwhile, appears set to reach consensus over maintaining its official output quota at a meeting in Vienna, as data showed the cartel's crude production was at the highest level for more than three years last month.

Ahead of Wednesday's meeting, the cartel's president Iran said the Organization of Petroleum Exporting Countries would reach consensus over output.

Kuwait's Oil Minister Mohammad al-Baseeri said OPEC would likely keep its production quota unchanged as the market was balanced and crude prices stable.

Analysts widely expect the Vienna-based organisation, which supplies a third of the world's crude, to maintain its official output target of 24.84 million barrels per day -- where it has stood for almost three years.

But with the International Energy Agency (IEA) estimating that actual OPEC production hit 30.68 million barrels of oil per day (mbpd) in November -- the highest amount in more than three years -- the cartel may decide to issue a statement promising stricter compliance with its quotas.


© 2011 AFP

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