Crude Rises on Iran Sanctions, Output Cut

WSJ

NEW YORK—Crude-oil futures moved 1.2% higher following news that the Obama administration had expanded sanctions on Iran.

Front-month light sweet crude oil on the New York Mercantile Exchange settled at $87.10 a barrel, up $1.02.

Analysts attributed Friday's price move to Thursday's news that the Obama administration expanded sanctions on Iran and to increased evidence that the Western policies are crimping Iranian oil output.

The U.S. Treasury and State Departments Thursday targeted dozens of banks and shipping companies that the U.S. believes are attempting to help Iran evade a European Union embargo on the purchasing of Iranian crude oil that went into effect this month.

The Treasury Department identified Swiss, Chinese, Malaysian and Emirati trading entities that the U.S. alleges are operating as fronts for Tehran's state oil companies, including the National Iranian Oil Co. The new sanctions focus on trying to block Iran's efforts to continue exporting oil, U.S. officials said.

The Iran story has been brewing in the markets for months, as Western diplomats try to press Iran to halt its nuclear program using a mix of diplomacy and new sanctions. Iran maintains its nuclear program is for peaceful purposes.

Greg Priddy, director of global oil at Eurasia Group in Washington, said the latest U.S. sanctions are "additive" measures to previous U.S. and European sanctions targeting banks and the insurance coverage for oil-tanker shipments. Mr. Priddy said he considers the chances to be "very low" that Israel will organize a military strike on Iran and "pretty low" that Iran for its part will proactively escalate with a military maneuver of its own.

But Mr. Priddy said the market has been caught off-guard by the effectiveness of the sanctions at limiting Iranian exports without permitting Iran to evade the measures. He estimated that the market will see one million to 1.5 million barrels a day of Iranian oil taken off-line because of the measures.

"Now the market is gradually waking up to the fact that the volumes lost are actually going to be pretty significant," Mr. Priddy said.

Kyle Cooper, a managing partner at IAF Advisors, a Houston consultancy, said the latest measures show that "the U.S. is making it more difficult to trade at any level with Iran."

The most-recent monthly oil report from the Organization of Petroleum Exporting Countries showed that Iran's production sank to 2.96 million barrels a day in June, down more than 188,000 barrels a day from the May level. Iran was pumping 3.7 million barrels a day in 2010.

Beyond the Iranian situation, analysts also continued to speculate on the chances of further quantitative easing.

Some observers said China could enact fresh moves to stimulate growth following its latest growth figures. China's gross domestic product rose by 7.6% in the second quarter from a year earlier, the slowest rate of growth since the first quarter of 2009.

While that was slower compared with the first quarter's 8.1% rise, it was in line with the 7.6% median forecast in an earlier Dow Jones Newswires poll of 15 economists.

Oil's move Friday defied new data that point to surprisingly weak consumer confidence. The Thomson Reuters/University of Michigan consumer-sentiment index fell to 72 at the start of July versus a reading of 73.2 in June, according to an economist who has seen the report. This reading marks the lowest of the year. Economists surveyed by Dow Jones Newswires had expected the preliminary reading in July to tick up to 73.5.

Analyst James Ritterbusch said oil prices could veer in different directions, given a busy U.S. economic data calendar next week. But even bad results could be good for the oil market if the data spur additional quantitative easing from the U.S. Federal Reserve. Previous rounds of quantitative easing have bolstered oil by weakening the U.S. dollar. A weaker dollar attracts buyers to the oil market because the commodity becomes less costly to other currencies, as it is purchased in dollars.

"We feel that any bearish shockers will only increase the likelihood of government stimulus efforts capable of reviving the oil market's appeal as an attractive alternative-asset class," Mr. Ritterbusch said.
—Jay Solomon, Cynthia Lin and Aaron Back contributed to this article.

Write to John M. Biers at [email protected]