Oil up $1, Iran hints of Gulf supply disruption

By Peg Mackey

LONDON (Reuters) – Oil prices climbed more than $1 to above
$73 on Monday after major exporter Iran hinted it might use oil
as a weapon in its nuclear dispute with the West.

The country’s Supreme Leader Ayatollah Ali Khamenei warned
on Sunday that flows from the Gulf, which supplies nearly 20
percent of the world’s energy, would be endangered if
Washington made a “wrong move” over Iran.

Officials from the world’s fourth biggest oil exporter
previously have said Iran would not halt crude shipments over
its nuclear standoff with the West.

But comments from Khamenei, who has the final say in
matters of state, suggested Tehran could disrupt supplies if
pushed.

U.S. crude traded $1.25 higher at $73.58 by 1135 GMT, after
gains of $1.99 on Friday. London Brent rose $1.41 to $72.44.

“The threat, whilst remote, would be serious in the context
of global oil markets operating with little more than 2 million
barrels per day of spare capacity,” a Citigroup report said.

Tension between Iran and the West over Tehran’s nuclear
program has helped drive oil’s 20 percent rally this year.

U.S. Secretary of State Condoleezza Rice reacted to
Khamenei’s comments by counseling a wait-and-see approach.

Washington offered to join European countries in talks with
Iran about its atomic work, but said Tehran must first suspend
uranium enrichment. Iran so far has rejected the demand, saying
enrichment was a national right.

President Mahmoud Ahmadinejad said on Saturday Iran would
consider proposals on incentives to stop nuclear work from the
United States, Russia, China, France, Germany and Britain but
insisted the crux of the package was unacceptable.

EU foreign policy chief Javier Solana was to present the
proposals to Iran on Tuesday.

Oil prices were also boosted by production problems at U.S.
refineries during the start of peak summer fuel demand.

“Every bump in refinery operations and every tropical storm
will keep gasoline prices quite bullish, relative to crude
oil,” PFC Energy said in a report.

The disruptions came at the start of what was expected to
be another busy storm season in the U.S. Gulf, where hurricanes
last year wrecked refineries and drove oil to record highs.

Oil product futures gained ground on Monday, with gasoline
up nearly 1.5 percent at $2.23 a gallon while heating oil
rallied 2.1 percent to $2.0571 a gallon.

OPEC producers agreed last week to leave output limits
unchanged and keep pumping at near full rates in a bid to ease
prices, which they worry will spur inflation that could slow
economic growth and sap oil demand.

OPEC linchpin Saudi Arabia said it cut output to 9.1
million barrels a day in April due to a drop in refinery
demand, not a desire to lower stock levels, the Wall Street
Journal quoted Oil Minister Ali al-Naimi as saying.

(Additional reporting by Neil Chatterjee in Singapore)