Oil prices rise after Iran missile test

July 9, 2008 7:33:07 AM PDT
Oil prices rebounded from consecutive days of steep declines after Iran test-fired nine missiles Wednesday, including Shahab-3 missiles capable of reaching Israel. Expectations that a U.S. crude supply report later in the day will show stocks at continued lows also supported prices.

Iran's elite Revolutionary Guards fired the missiles during war games that high-ranking military officials say are a response to U.S. and Israeli threats.

Gen. Hossein Salami, a top commander, was quoted on state television saying the exercise "is to demonstrate our resolve and might against enemies who in recent weeks have threatened Iran with harsh language."

Light, sweet crude for August delivery rose $1.44 at $137.48 a barrel on the New York Mercantile Exchange on Wednesday. The contract on Tuesday fell $5.33 to settle at $136.04 a barrel.

"Iran is certainly sending mixed signals," said Victor Shum at Purvin & Gertz in Singapore. "There was an apparent easing of tensions, but then the missile tests had an impact on prices today."

Tuesday's decline dropped crude to levels not seen since June 26. The market's bearish turn this week erases, at least for the time being, part of a run-up that pushed prices past $145 a barrel in a string of record-setting sessions before the Fourth of July holiday.

Analysts attributed much of the sell-off the last two days to profit-taking, saying traders were cashing in on the previous week's gains. A stronger dollar also helped keep prices lower by discouraging investors from pumping more money into commodities.

Fears that the economic slowdown is spreading had moved to the forefront.

"Sagging global equities, which are tipping a lack of confidence in economic growth in both developed and emerging economies, helped trigger the retreat in the energy markets," Addison Armstrong, director of market research at Tradition Energy, said in a research note.

Still, analysts also warned that the pullback could be fleeting.

"Oil's bull run is not over. There are still many supply side concerns, such as Iran," Shum said. "Spikes in the price of oil in the coming weeks are possible. Some traders may see this pullback as a buying opportunity."

Oil hit a trading record of $145.85 last week before settling at a record close of $145.29 a barrel.

Bringing prices back was Iran's military drill, which took place in the Persian Gulf and the Strait of Hormuz, where about 40 percent of global oil exports pass.

Concern over the unruly oil market was a top priority Tuesday at a summit of industrialized powers in Rusutsu, Japan, with leaders calling on petroleum suppliers in a communique to boost production and refining and to increase investment in oil exploration and output over the medium term.

The G-8 - which groups the U.S., Britain, Japan, France, Germany, Canada, Russia and Italy - also called for diversifying sources of energy and further efforts to improve energy efficiency.

"We remain positive about the long-term resilience of our economies and future global growth," the communique said, noting that growth in emerging economies remained strong. "However, the world economy is now facing uncertainty and downside risks persist."

Traders were also awaiting U.S. inventory data, to be published later in the day. Vienna's JBC Energy noted in its research note that "at below 300 million barrels, crude stocks are currently at the lowest level in a lest five years," adding: "imports remain weak and refiners are reluctant to stock up at the current high oil price."

In other Nymex trade, heating oil futures rose nearly 8 cents to $3.8975 a gallon while gasoline prices added more than 4 cents to fetch $3.4089 a gallon. Natural gas futures slipped marginally to $12.360 per 1,000 cubic feet.

August Brent crude rose $1.93 to $138.31 a barrel on the ICE Futures exchange in London.