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Oil price falls as Saudis trump Iran threat

A Saudi oil ministry official told The Associated Press that Saudi Arabia and other Gulf producers are ready to provide more oil if Iran tries to block the strait. (AP photo)

The Associated Press

12/28/2011

NEW YORK — Oil prices fell on Wednesday, after Saudi Arabia said it will offset any loss of oil from a threatened Iranian blockade of a crucial tanker route in the Middle East.

The U.S. Navy warned that any disruption of traffic through the vital Strait of Hormuz "will not be tolerated."

In New York, benchmark crude fell $1.98, or about 2 percent, to finish at $99.36 a barrel.

Brent crude fell $1.71 to end at $107.56 a barrel in London.

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On Tuesday Iran's vice president said that his country was ready to close the Strait of Hormuz — a vital waterway through which a third of the world's tanker traffic flows — if western nations embargo the country's oil because of Iran's ongoing nuclear program. The head of the country's navy added on Wednesday that his fleet can block the strait if need be. His comments came as Iran held a 10-day drill in international waters near the strategic route, which is 21 miles wide at its narrowest point.

A Saudi oil ministry official told The Associated Press that Saudi Arabia and other Gulf producers are ready to provide more oil if Iran tries to block the strait. The official spoke on condition of anonymity because he was not authorized to discuss the issue. He didn't specify other routes that could be used to transport oil, although they would likely be longer and more expensive for getting crude to the region's customers.

"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," said Lt. Rebecca Rebarich, a spokeswoman for the U.S. Navy's Fifth Fleet, which is responsible for naval operations in the Persian Gulf, the Red Sea and the Arabian Sea.

Some analysts think the Iranian threats are more rhetoric than reality. "We doubt political posturing will turn into action," energy consultant and trader Stephen Schork said in a report.

"Shutting down the strait ... is the last bullet that Iran has and therefore we have to express some doubt that they would do this and at the same time lose their support from China and Russia," said analyst Olivier Jakob of Petromatrix in Switzerland.

Iran is the fourth largest oil exporter in the world, according to the Energy Department. Most of its crude goes to Asia, with China its biggest customer. Oil provides half of Iran's revenue. Last year that amounted to about $73 billion.

Oil prices were also undercut on Wednesday by persistent worries about Europe and future demand for oil as the region's economy weakens. The European Central Bank said the continent's banks parked a record $590.72 billion overnight with the ECB, reflecting distrust in the European banking system.

In other energy futures trading, heating oil fell 2 cents to finish at $2.89 a gallon, gasoline fell 4 cents to end at $2.65 a gallon and natural gas fell 3 cents to finish the day at $3.08 per 1,000 cubic feet.

AP writers Ali Akbar Dareini in Teheran, Tarek El-Tablawy in Cairo, Abdullah Shihri in Riyadh, Adam Schreck in Dubai and Pablo Gorondi in Budapest contributed to this report.

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