Oil slips to near US$87 as Iran tensions simmer


THE price of oil slipped to near US$87 a barrel yesterday, giving back some of the large gains from the previous day amid growing tension between Iran and Western powers.

By early afternoon in Europe, benchmark oil for August delivery was down 60 cents at US$87.06 a barrel in electronic trading on the New York Mercantile Exchange. Trading volume was light because markets in the US were open for only a half-day Tuesday and are closed yesterday for the Independence Day holiday.

On Tuesday, the Nymex contract jumped US$3.91 to close at US$87.66 in New York after Iran said it test-fired several ballistic missiles in war games exercises.

The acting commander of Iran's Revolutionary Guard told state TV that the tests were a response to the refusal by Israel and the US to rule out military strikes to stop Iran's nuclear program.

A European Union ban on Iranian oil came into full effect July 1, and analysts expect the sanctions to cut the crude exports of Iran, OPEC's second-largest producer.

The US military has recently doubled the number of minesweepers in the region, giving it greater flexibility to counter any Iranian effort to mine the Strait of Hormuz at the mouth of the Persian Gulf, where about a fifth of the world's oil supply passes.

Some analysts said that the Iranian missile test did not justify the jump in oil prices.

"Despite the fact that it is treated each time as a major new development, having Iran test a Shahab-3 missile during the annual 'Great Prophet' military exercises is fully routine," said Olivier Jakob, an analyst from Petromatrix in Switzerland. "The Iranian geopolitical risk exists and should not be denied, but the specific test-fire of missiles (Tuesday) does not represent an increase per se of that risk."

Jakob also noted that Iranian missile tests and the possibility of Tehran blocking the Strait of Hormuz were in the headlines four years ago, when oil peaked at a record price above US$147 on July 11, 2008.

Meanwhile, the latest US supply data suggest demand may be improving. The American Petroleum Institute said late Tuesday that crude inventories fell 3 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted a drop of 2 million barrels.

Inventories of gasoline fell 1.4 million barrels last week, the API said.

The Energy Department's Energy Information Administration reports its weekly supply data - the market benchmark - today.

Crude has jumped from US$77 last week amid optimism that European leaders are making progress toward stabilizing the region's debt and economic crisis. Investors have brushed off recent signs that the global economy is slowing and fueled a rally in stocks and commodities so far this week.

"While markets have reacted favorably to the news following the EU leaders' summit, a definitive resolution to the problems in Europe is still a long way off," National Australia Bank said in a report. "The global growth outlook has started to look a little shakier following a recent run of sluggish economic indicators."

In other energy trading, Brent crude for August delivery was down 94 cents at US$99.74 per barrel on the ICE Futures exchange. Heating oil was down 2.13 cents at US$2.7372 per gallon while gasoline futures fell 1.46 cents at US$2.7083 per gallon. Natural gas gained 1.8 cents at US$2.917 per 1,000 cubic feet.



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