NEW YORK – Crude oil prices surged above $66 a barrel Thursday, driven to a new six-month high by concerns that strained relations between Iran and the West could put oil exports in jeopardy as U.S. gasoline supplies wane and demand swells.
Light, sweet crude futures for May soared $1.95 to settle at $66.03 a barrel on the New York Mercantile Exchange, after rising as high as $66.50. It was the highest settlement price since Sept. 8, 2006, when crude finished at $66.25, but still far off the record trading high of $78.40 reached in mid-July.
Pump prices kept rising as well: the average U.S. retail price of unleaded regular gasoline was $2.62 a gallon Thursday, 12 cents higher than a year ago, according to AAA.
Iran detained 15 British navy personnel last week, and on Thursday the country suspended the release of a female British sailor, and a top official said the captives may be put on trial. The incident comes several months into a standoff between Iran, the fourth-largest oil producer, and the United Nations over the country's nuclear program.
Worries related to Iran — which is also located on a key waterway in the oil trade — have led traders to put an extra premium on oil prices, which are already high due to seven straight weeks of declines in U.S. gasoline inventories.
Traders aren't saying they believe war with Iran is likely, but in an environment of high demand and falling domestic supplies, they maintain the effects of a large-scale conflict on the energy markets could be huge.
Iran is positioned along the Strait of Hormuz, through which tankers ship about 17 million barrels of crude oil per day, according to the Energy Information Administration. That accounts for two-fifths of the world's crude oil traded by tanker, and about one-fifth of total oil production. The exports exiting the narrow waterway are bound for the United States, Western Europe and Japan.
"We're in a short-term business. If oil were to stop flowing there for a period of time, fear will run rampant and oil will be in the 70s immediately," said James Cordier, president of Liberty Trading Group in Tampa, Fla.
Cordier estimated that concerns related to Iran are adding about $3 to $4 to the price of crude right now, and that supply disruption in the Strait of Hormuz would add another $4 or $5.
Gasoline futures climbed 7.83 cents to settle at $2.1355 a gallon.
U.S. inventories of gasoline remain in the upper half of the typical range for this time of year, but U.S. gasoline demand averaged 9.2 million barrels a day over the past four weeks, up 1.6 percent from the same period last year, the EIA said Wednesday. Wachovia economist Jason Schenker pointed out that these demand levels weren't seen last year until May.
"Supply is down, demand is up. These are fundamentals that mean higher prices," Schenker said. "As long as the unemployment rate remains low and disposable income is up, gasoline demand is likely to be strong."
Gasoline prices at the pump — which had surged about 20 percent since the beginning of the year even before Iran detained the British sailors — continue to rise. Schenker noted that the average U.S. pump price is the highest it's ever been for March, and said it could reach a range of $2.75 to $3.35 a gallon by the summer. The highest recorded national average was $3.057 in September 2005, according to AAA, after Hurricane Katrina hit the Gulf Coast.
Californians are seeing the highest prices in the country, with gas stations charging an average $3.216 a gallon for regular unleaded, AAA data showed.
Tom Kloza of the Oil Price Information Service in Wall, N.J., said it's normal for West Coast prices to be higher than the rest of the country, but that the disparity is wider than usual, largely because California has seen more refinery downtime than other states and there is little new production capacity in the offing.
Many market watchers believe that U.S. refinery production — which last week inched up to 87 percent — could be higher, but that refiners are waiting for prices to rise further so they can make bigger profits.
The United States recently had the warmest winter on record, Cordier noted, and last year's hurricane season didn't bring any damaging storms.
"There's absolutely no excuse for tight gasoline supplies. I hate to step on any toes, but that's manipulation," he said. But "they're private companies; there's not much you can do or say."
In other Nymex trading, heating oil rose 4.98 cents to settle at $1.8772 per gallon, and natural gas slipped 6.3 cents to settle at $7.609 per 1,000 cubic feet.
The EIA reported Thursday that U.S. natural gas in storage fell by 22 billion cubic feet last week to 1.511 trillion cubic feet.
Brent crude on London's ICE futures exchange rose $2.10 to $67.88 a barrel.