Oil climbed near to $65 a barrel on Wednesday, after a $5 spike to six month highs overnight on a rumour, quickly dismissed by the United States, that a U.S. naval vessel had clashed with Iran.
Britain denied another market rumour that it had sent troops to release 15 British military personnel being held in Iran.
However, Sky News is reporting that the UK has suspended all business and diplomatic ties with Iran over the detention of the British sailors. The UK claims that it has proof that the soldiers were 1.7 miles inside Iraqi waters at the time they were seized.
Foreign Secretary Margaret Beckett told parliament that Britain would also “keep other aspects of our policy towards Iran under close review and will continue to proceed carefully”.
Oil’s surged to $68.09, its highest since September 6th, highlighting anxiety over supplies from the Gulf and in particular Iran, the world’s fourth-biggest exporter, which is at odds with the United Nations over its nuclear programme.
Tehran’s detention of the British sailors has raised the tension still further.
“The price reaction just shows that actually it was clearly not the most likely scenario the market had in mind regarding Iran,” said Frederic Lasserre, head of commodities research at Societe Generale.
The market was expecting a lengthy and difficult diplomatic process over Iran’s nuclear programme as opposed to any military action, he said.
“After this rumour of a military problem, the market will now factor something in the price just to reflect that any military action is more probable than the market thought a few days or weeks ago.”
U.S. crude soared in electronic after-hours trade on Tuesday.
It stood at $64.73 at 1136 GMT, up $1.76 from Tuesday’s settlement of $62.93, determined before the rumours took hold.
London Brent crude was up $1.80 cents at $66.42 a barrel, extending a six-day rally that has added about 10 percent to prices, pushing them nearer the danger zone for consumer nations who fear they could stymie economic growth.
Equity markets fell in response to the tensions over Iran.
“The main equity markets remain on fragile feet, we are not sure of their ability to withstand a surge in oil prices,” said Olivier Jakob, of oil consultancy Petromatrix.
RUMOURED MILITARY ACTION
U.S. officials knocked down any talk of military action.
The rumours surfaced just as a second U.S. aircraft carrier moved into the Gulf to carry out military exercises. Iran’s navy began a week of exercises in the Gulf last Thursday.
“We have no information at this time that indicates any incident taking place,” said White House National Security Council spokesman Gordon Johndroe.
British Prime Minister Tony Blair on Tuesday warned Iran that diplomatic efforts to free the sailors and marines could give way to a “different phase” if they were not released. Iran has said it may charge them with illegally entering its waters.
Britain was expected to reveal evidence on Wednesday to show the sailors and marines, captured last week by Iranian gunboats near the waterway that separates Iran and Iraq, had been in Iraqi waters.
So far there has been no disruption to Iran’s daily shipments of around 2.2 million barrels.
U.S. DATA
Weekly U.S. fuel data later on Wednesday is likely to show a seventh-straight fall in gasoline stocks in the world’s biggest consumer as it prepares for peak summer demand.
Analysts are forecasting a 1.8 million-barrel gasoline draw for the week ending March 23, along with a 1.6 million-barrel rise in crude stocks and a 1.2 million-barrel draw in distillates, a Reuters poll showed.
A strike by workers at the French Mediterranean oil terminal Fos-Lavera, entering its third week, has begun to hit refinery output and also raised concerns over Europe’s ability to export fuel to the United States.
Offsetting the supportive fundamental picture, U.S. economic data painted a darkening picture, with consumer confidence weakening in March and U.S. single-family home prices registering their first annual decline in more than a decade.
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