Oil price falls after US warns Iran over threat to close Gulf supply route

US navy says Iranian threat to block the strait of Hormuz will not be tolerated, pushing Brent crude price down to $107 a barrel


Heather Stewart
guardian.co.uk, Wednesday 28 December 2011


Oil prices fell on Wednesday after the US navy said Iran's threat to block the strait of Hormuz, an important supply route for crude exports from the Gulf, would not be tolerated.

After Iran warned it could respond to threatened sanctions from the US by closing the strait, a spokesman for the fifth fleet, the arm of the US navy based in Bahrain, issued a statement saying: "Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated."

The cost of a barrel of Brent crude fell by $2.20 a barrel to $107.07 in London trading, after rising for six successive days. In New York, US crude fell $1.99 to $99.35 by lunchtime.

Thorbjørn Bak Jensen, oil analyst with Global Risk Management, said: "The threat by Iran to close the strait of Hormuz supported the oil market yesterday, but the effect is fading today as it will probably be empty threats, as they cannot stop the flow for a longer period due to the amount of US hardware in the area."

Iran's top naval commander, admiral Habibollah Sayyari, repeated the threat on Wednesday, telling state television that closing off the strait to tankers would be "easier than drinking a glass of water", adding that "Iran has comprehensive control over the strategic waterway."

Iran's warning was first issued on Tuesday, as the US prepared to tighten economic sanctions on the renegade state, amid growing evidence that it is preparing a nuclear weapons programme. The US Congress has passed a bill penalising any company that does business with the Iranian central bank, which handles oil transactions from the Gulf state.

The EU is considering targeting Iran's oil industry after last month's attack on the UK embassy in Tehran, which was widely perceived as having tacit government support.

Tehran knows that a sudden rise in oil prices would come at a dangerous time for the west, with the sovereign debt crisis in the eurozone threatening to drag the rest of the world into a double-dip recession.

Saudi Arabia has sought to play down fears of a supply shortage if Iran sought to restrict shipments through the strait, the route taken by many oil tankers bringing crude oil from Gulf states to western markets, including the US. If oil tankers were forced to take a more circuitous route, it could push up costs significantly.

An official from the Saudi Arabian oil ministry said the world's largest oil producer stood ready to ramp up supplies if Iran carries out its threat.

Relations between Saudi Arabia and Iran have soured significantly in recent months, though a recent meeting of the oil producer's cartel, Opec, in which the two are leading members, ended in an agreement to maintain output at current levels. Iran is the world's fourth-largest oil producer, pumping 4m barrels a day, and oil exports make up 80% of government revenues.