Oil at $90 a barrel?

By Elizabeth Strott

A sudden spike in oil prices Tuesday has traders wondering whether oil prices are about to start surging again.

In just seven minutes late Tuesday, oil futures jumped more than $5, or 8%, to $68.91 -- the highest level since September -- as an unfounded rumor of an attack on U.S. Navy warships by Iran circulated on the trading floors.

Oil later fell back but has continued to climb above $64, closing yesterday at its highest closing price for 2007. Oil prices were up $1.82 cents to $65.91 this afternoon, and the sharp reaction has observers wondering how high oil will go this time.

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"This Iranian situation will probably speed up the process" of oil price increases, said Phil Flynn, an oil trader at Alaron Trading. "One rumor late (Tuesday) had this market rally $5 in five minutes -- that gives a taste of what could happen in the next few months.

"I foresee a scenario where oil could shoot up $20 a barrel on such news," pushing the price of oil to between $80 and $90, Flynn said.

Tensions continue

Tuesday's rumor turned out to be just that, but tensions stemming from Iran's capture of 15 British sailors on Friday look unlikely to ease anytime soon. Today, Britain rejected a demand by Iran to admit that the sailors had entered Iranian waters, The Wall Street Journal reported, a move that would have allowed visits to the sailors.

"It is now time to ratchet up the pressure," British Prime Minister Tony Blair said in Parliament Wednesday.

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Iran's foreign minister said today it delay the release of the one woman among the captives if Britain asks the United Nations for help. Yesterday, Iran had said it would release her today or tomorrow.

Adding to the nervousness, Iran said Monday that it was partly suspending cooperation with the United Nations' nuclear watchdog and that sanctions by the U.N. would not stop Iran from moving forward with its uranium enrichment program "even for a second."

Another hostage crisis?

Analysts found themselves using uncomfortably familiar language to refer to the current situation in Iran.

"Every day that this hostage crisis continues . . . is another day with the potential for extreme action, military action," oil analyst Peter Beutel of Cameron Hanover said in his daily research note Wednesday.

"The fact that Iran continues to enrich uranium against the U.N. Security Council's resolutions means that there are those in the U.S. and Britain who want to shoot first and ask questions later. Of course, that has the potential of pushing oil prices to numbers not previously seen."

Summer driving season around the corner

Even if the brewing Iran crisis is defused, Alaron's Flynn argued, oil prices are almost certainly headed higher. With the summer driving season approaching, "it's possible that we could see $78 per barrel this summer," Flynn said. "The fundamentals target this market in the mid-$70s without the Iranian situation."

Wednesday's weekly report from the Energy Department showed declines in supplies of distillate and gasoline stocks. Crude oil supplies fell by 900,000 barrels to 328.4 million last week.

Oil traded as high as $78.40 a barrel last July.

Conflict with Iran looming?

But the situation in Iran could easily complicate things, said Fadel Gheit, oil analyst at Oppenheimer.

Iran is a "tough nut to crack," Gheit said, adding that he believes the British are in for a long, painful stay.

Concern that the United States is waiting for an opportunity to get involved is growing, Gheit added. "If we think the Iraq war was a mistake, this would be an apocalypse."

Nearly one-quarter of the world's oil flows through the Strait of Hormuz, between Iran and Oman.

Iran is the world's second-largest oil producer and exports more than 3 million barrels of oil a day. It holds more than 10% of the world's confirmed oil supplies.

And Gheit notes that growing tensions could spill over to affect the broader stock market.

"Tension is high," Gheit said. The volatility in oil prices will continue to reflect tension in the region, and "worries could depress the stock market."

"There is no question in my mind that if we have a military strike against Iran, oil prices will rise," he added. "The question is by how much."