Oil: Gains as Iran warns of Gulf supply disruption

NEW YORK - Oil prices rose on Monday after Iran warned Washington that a "wrong move" in the standoff over Tehran's nuclear ambitions would endanger flows from the Gulf, which pumps nearly a quarter of the world's crude.

The remarks from Supreme Leader Ayatollah Ali Khamenei raised concerns growing tension between the West and Iran, the world's No. 4 oil exporter, could disrupt crude shipments from the region. Iranian officials previously had said Tehran would not use oil as a weapon.

"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.

US crude settled 27 cents higher at US$72.60 a barrel after jumping to US$73.84 earlier in the day. London Brent rose 34 cents to US$71.37.

US oil futures briefly traded lower in late activity after Federal Reserve Chairman Ben Bernanke said the Fed needed to be vigilant to ensure inflation stays under control even as the economy starts to show a slower pace of growth.

Analysts have been concerned that rising energy costs, which hit records in recent months on geopolitical tensions, could spur inflation and hurt the economy.

Gains also were tempered by a US government report showing offshore crude production rising 115,000 barrels per day since early May as oil companies made strides recovering from last year's devastating hurricanes.

Tension between Iran and and the United States over Tehran's nuclear programme has helped drive oil's 20 per cent rally this year.

US 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 is a national right.

President Mahmoud Ahmadinejad said 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 Tuesday.

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

"Every bump in refinery operations and every tropical storm will keep petrol 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 US Gulf, where hurricanes last year wrecked refineries and drove oil to record highs.

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.

- REUTERS