OIL prices have climbed to the highest level since May on concerns that Iran will cut off more oil to Europe.
Benchmark crude rose by US$2.65, or 2.6 percent, to end the day at US$106.25 per barrel on the New York Mercantile Exchange. That's the highest price for oil since May 4.
Brent crude, used to price foreign oil varieties imported by US refineries, rose by US$1.61 to finish at US$121.66 in London.
"People are just scared about Iran," independent analyst and trader Stephen Schork said. "They're concerned about supply."
The rise in gasoline is expected to be a drag on the recovering US economy
The surge could make gasoline and other fuels more expensive if prices stay high. At a national average of US$3.57 per gallon, US pump prices already are the highest ever for this time of year, and analysts say they may reach a record US$4.25 per gallon (US$1.12 a liter) this spring.
The rise in oil follows an announcement by Iran over the weekend that it will stop selling oil to Britain and France in retaliation for a planned European oil embargo this summer. The move was mainly symbolic - Britain and France import almost no oil from Iran - but it raised concerns that Iran could take the same hard line with other European nations that use more Iranian crude.
The European Union buys about 18 percent of Iran's oil exports, though most of that comes from sales to just two countries: Italy and Spain.
Iran's Foreign Ministry also said Tuesday that visiting inspectors won't be able to inspect the country's nuclear facilities. An International Atomic Energy Agency team arrived in Tehran this week hoping to monitor Iran's nuclear program. Instead it will only hold talks with officials about ways to cooperate in the future.
"Some were hopeful that we were stepping back from the brink" of a protracted conflict in the region, PFGBest analyst Phil Flynn said. "But if they're not going to be able to inspect, then what's the point of being there?"
Iran has been embroiled in a standoff with the US and Europe for several months over its nuclear program. Western nations fear Iran is building a nuclear weapon and have been trying to put financial pressure on the country to abandon the program.
The European Union has frozen assets of Iran's central bank, and it plans to stop buying Iranian oil after July. If Iran stops selling oil to some European countries ahead of the embargo, refineries will have to find alternative sources of oil sooner than planned.
A scramble for alternate oil sources would temporarily boost oil demand and prices, analysts said.
"We have every reason to expect to see prices advance on this latest Iranian news," Cameron Hanover analyst Peter Beutel said.
Oil prices also were supported by Europe's approval of a US$170 billion lifeline to Greece yesterday. The decision, which includes an agreement by Greece to cut spending, raised hopes that Europe will contain a banking crisis that has hurt its economy and weakened energy demand.
So far this year, benchmark oil has risen 7 percent.
In other energy trading, heating oil rose by 5 cents to end at US$3.24 per gallon and gasoline futures rose by 5 cents to finish at US$3.07 per gallon. Natural gas futures fell by 6 cents to end at US$2.63 per 1,000 cubic feet.