Oil advances as North Korea, Iran ratchet up tensions

Oil rose on concern that geopolitical tension will increase as a son of Kim Jong Il took power in North Korea and the U.S. and its allies prepared to discuss stronger measures against Iran.

Futures advanced as much as 1% after the official Korean Central News Agency said Kim Jong Il died on Dec. 17 and that Kim Jong Un will now lead the nuclear-armed nation. Gulf Cooperation Council leaders arrived in Riyadh today for a two- day meeting that may focus on actions needed against Iran.

“Geopolitical worries are boosting the market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The announcement of the death of Kim Jong Il adds to the concerns about stability. The market was already nervous about Iran.”

Crude oil for January delivery increased 35 cents, or 0.4%, to $93.88 a barrel at 2 p.m. on the New York Mercantile Exchange. The January contract expires tomorrow. The more actively traded February futures rose 32 cents, or 0.3%, to $94.07.

Brent oil for February settlement on the London-based ICE Futures Europe exchange increased 47 cents, or 0.5%, to $103.82 a barrel.

Tensions on the Korean peninsula have risen since North Korean attacks last year that killed 50 South Koreans on a warship and a disputed island. The administration of President Barack Obama, along with the United Nations, increased sanctions after the incidents.

“It’s another wild event in a wild year of news,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “It’s bullish for oil prices in the short term.”

Eleven countries including the U.S. and European and Arab states will meet tomorrow in Rome to discuss more aggressive tactics against Iran, the Wall Street Journal reported, citing people it didn’t identify. In Riyadh, Saudi Arabia’s King Abdullah called on the Gulf Cooperation Council’s six nations to strengthen into a “single entity” at a summit that may also focus on unrest in Syria.

“Tomorrow’s meeting on Iran sanctions is probably top on people’s list of concern,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Oil prices may surge if international sanctions halt supplies from Iran, Bank of America Corp. analysts said. The Persian Gulf nation is on the Strait of Hormuz, through which one-sixth of global oil output is transported daily, according to the U.S. Energy Department.

“Oil prices could increase by $40 a barrel should Iranian output completely shut down,” Francisco Blanch, the bank’s head of commodities research in New York, said in an e-mailed report. “A potential closure of the Strait of Hormuz could result in a much faster oil price escalation.”

Iran is the second-largest member of the Organization of Petroleum Exporting Countries, trailing Saudi Arabia.

Futures fell earlier after European Central Bank President Mario Draghi said the region’s economy faces substantial risks.

The economy “should recover, albeit very gradually, in the course of 2012,” Draghi said. “Substantial downside risks to the economic outlook nevertheless remain.”

In an earlier interview with the Financial Times, Draghi damped expectations that the ECB will step up bond purchases to tame the sovereign debt crisis.

“Some of Draghi’s comments were being viewed negatively and the market faded a little bit more,” said Tom Bentz, a director in New York with BNP Paribas Prime Brokerage Inc. “The rally in oil can’t seem to gain any traction.”

European finance ministers today were to discuss 200 billion euros ($261 billion) in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.

The 27 European Union member states accounted for 16% of global oil consumption in last year, based on BP Plc’s Statistical Review of World Energy.