Oil surges $4, then eases, on Iran concerns

REUTERS

Oil surged nearly $4 a barrel on Tuesday in a furious burst of trading that traders struggled to explain, citing renewed jitters over Iran, expectations of further monetary easing and possibly computer-driven trading.

Brent and U.S. crude prices shot up quickly at 9:45 a.m. EST (1445 GMT), briefly tacking $3 on to earlier gains as volumes surged in one of the most concentrated bursts of trading activity in months. Other commodity markets did not jump, and more than an hour later traders were still unable to pinpoint a specific trigger for the sudden rise.

Several traders pinned the move on rising tensions in OPEC member Iran a day after a news redistribution service appeared to have drawn market attention to comments made on Monday by a member of the Iranian parliament who said the military was set to practice shutting the Strait of Hormuz, the world's most important oil shipping route.

Market participants also cited talk the U.S. Federal Reserve could be mulling a third round of quantative easing, known in financial markets as QE3.

"I think it is moving up because of talk that (Fed Chairman) Bernanke is looking at a QE3 for next year," said Carl Larry, president of Oil Outlooks LLC, in New York. Other market participants said the move could have been tied to computer driven trading.

Adding to supply concerns, the Houston Ship Channel, an important oil transport waterway to the region's refining network, shut following a collision between a tanker and a cargo vessel.

Trading volumes eased after the brief surge, with Brent up $1.82 at $109.08 a barrel by 12:54 p.m. EST (1754 GMT), off a session high of $111.10 a barrel. U.S. crude gained $2.09 to trade at $99.86 a barrel, after reaching $101.25.

In early afternoon activity, U.S. crude trading volumes were about 19 percent below the 30-day average, while Brent volumes were about 16 percent below the average.

Markets were also watching comments by OPEC ministers gathering in Vienna ahead of Wednesday's meeting.

The group's leading oil price hawks on Tuesday sought a face-saving compromise on a new 30-million barrel-a-day production target for the cartel, near current output. The deal is designed to restore OPEC's credibility after talks fell apart in June and left it without its normal self-imposed output constraints.

OPEC, as well as the International Energy Agency, on Tuesday said high production levels by the producer group will help balance oil markets next year as demand growth slows.