Oil prices surge nearly 4% as Iran tensions worry traders

By Andrew Oxlade
Updated: 12:57 EDT, 3 January 2012

• Better news for global economy also helps underpin demand for crude
  

Oil prices rocketed higher today following a worsening in diplomatic tensions between the U.S. and Iran.

The cost of Brent crude jumped nearly 4 per cent - up $4 a barrel to $111.4 by late afternoon.

Traders are concerned that Iran might try to close the Strait of Hormuz to oil tankers if the West imposes new sanctions.

Force: The Nimitz-class USS John C. Stennis aircraft carrier sailed through the Strait of Hormutz last week after visiting Jebel Ali port in Dubai

Iran warned the U.S. to stay out of the strategic waterway, where 40 per cent of the world's traded oil is shipped.

Iran's navy yesterday fired a cruise missile as part of a military exercise.

The USS John C. Stennis, along with another vessel, left the Gulf through the Strait of Hormuz last week after Iran launched a series of military exercises.

Iran has threatened to take action if a U.S. aircraft carrier returns to the Persian Gulf.

Speaking at the end of 10 days of naval exercises today, General Ataollah Salehi said: 'Iran will not repeat its warning... the enemy's carrier has been moved to the Sea of Oman because of our drill.

'I advise, recommend and warn them [the Americans] over the return of this carrier to the Persian Gulf because we are not in the habit of warning more than once.'

Gen Salehi did not name the vessel, or give details of the action Iran would take if it does return.

The USS John C. Stennis is one of the U.S. Navy's largest vessels.

It had been on a 'routine' passage through the Gulf after visiting Dubai's Jebel Ali port last Tuesday.

Map showing the Strait of Hormuz where Iran has been carrying out a 10-day navy drill

Iran has staged a series of naval exercises at the mouth of the Gulf, including the test-firing of three missiles designed to sink warships and 'mock' drills on shutting the strategic waterway.

Analysts had suggested that it was high unlikely Iran would close the waterway given its own financial dependence on selling oil, but today's market reaction suggests some traders are taking the threat seriously, with much of the price increases coming this afternoon.

However, there was also better economic news today. Survey data from the U.S., China and India boosted hopes for a global recovery, which would underpin demand for oil.

In America, the Institute for Supply Management said its index of national factory activity had risen to 53.9 in December, better than expected and up from 52.7 the month before.Any figure above 50 indicates growth in the sector.

It followed upbeat news on the U.S. economy last week and echoed recent stronger-than-expected manufacturing data from China and India.

There was also some better news for the UK economy. Manufacturing activity shrunk by less than expected in December but could not recover enough ground to prevent the worst quarter for the sector in nearly three years, adding to fears of a new recession.

The Markit/CIPS purchasing managers' index (PMI) survey, where a reading below 50 indicates a contraction, rose to 49.6 in December, from 47.7 the previous month. The City had been expecting a fall to 47.3.

Manufacturers were boosted by stronger new export orders, which helped make up for the weakness of UK demand.

The rise in oil prices, if sustained, will come as a fresh blow to consumers. The price of Brent oil trended lower and stabilised in the final months of 2011 after hitting a high of $126 in April.

Petrol prices, which are dependent on wholesale fuel prices and currency swings, have fallen marginally in recent weeks. The price of Brent dipped below $105 before Christmas.