WASHINGTON - Crude-oil prices charged to a three-and-a-half month high above $66 a barrel Tuesday amid growing unease about the possibility of sanctions against Iran, OPEC's second-largest producer, because of its nuclear ambitions.
Rising violence in oil-rich Nigeria contributed to the runup of more than $2 a barrel, as did a reported refinery snag and a forecast from an international energy watchdog calling for reduced non-OPEC crude output in 2006.
February crude futures leaped $2.39 to settle at $66.31 a barrel on the New York Mercantile Exchange, the highest close since Sept. 29, when oil finished at $66.79.
Futures prices for fuels refined from oil, such as gasoline and heating oil, also soared.
Analysts said that unless there is a quick resolution to the dispute between Iran and the West over Tehran's nuclear program, oil prices could soon climb above $70 a barrel and even test the Aug. 30 all-time high of $70.85.
"Seventy-dollar crude is on the way," said James Cordier, president of Tampa, Fla.-based Liberty Trading. "It's almost a done deal."
But analysts cautioned that oil prices at that level for any sustained period of time could considerably slow economic growth, and dampen energy demand.
"The calculus of perpetually higher prices assumes that nothing will change," said oil analyst John Kilduff of Fimat USA in New York. Kilduff said he is not comfortable with such an outlook because it discounts the likelihood that higher prices will eventually lead to reduced demand, and thus lower prices.
For the time being, however, energy traders must deal with strong global demand and a potentially serious threat to oil supplies on the horizon.
"The Iranian nuclear issue is driving the market," said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo. "The issue poses a threat of supply disruption in a major oil-producing country."
Analysts also said recent attacks on oil facilities in Nigeria - Africa's leading oil exporter and the fifth-biggest source of U.S. oil imports - were supporting crude's rise. Amid the rising violence in Nigeria, Royal Dutch Shell PLC said it was forced to slash output there by another 115,000 barrels per day, bringing total production cuts to 221,000 barrels per day.
Negotiators were working Tuesday to free four foreigners held hostage in the nation's southern oil region as militants claiming to hold the captives said they would target oil installations if their demands were not met within days.
In London, March Brent crude on the ICE Futures exchange rose 99 cents to $64.17 a barrel.
Heating oil futures surged 7.65 cents to close at $1.7915 a gallon while gasoline futures advanced 9.22 cents to settle at $1.8233 a gallon. The jump in refined product prices was a reflection of the higher oil price, as well as a reaction to a reported shutdown of a New Jersey refinery.
Natural gas futures also rode higher on the back of the oil-market rally, gaining 37.7 cents to $9.168 per 1,000 cubic feet.
Russia and China on Monday joined the U.S. and its European allies in demanding that Iran fully abandon its nuclear program. The powers called for an emergency board meeting of the International Atomic Energy Agency on Feb. 2-3 to discuss the issue.
The West fears Iran intends to build an atomic bomb, but Iran claims its program is intended only to produce electricity.
Meanwhile, the International Energy Agency on Tuesday reduced its forecast for non-OPEC supply growth by 100,000 barrels per day, but left its forecast for world oil demand this year unchanged at 85.1 million barrels a day, up more than 1.8 million barrels a day against last year.
The group also projected that Chinese oil demand bounced back from weakness late last year, with an expected near-7 percent growth in December.
However, Cordier said the IEA's forecast doesn't adequately address the possibility of sanctions against Iran and the possible global economic implications if the country's oil output declines as a result.
"Sanctions definitely mean crude oil off the market," said Cordier, who added: "There's no question it comes to a point where we're going to slow global growth at $70 a barrel."