Oil prices rose Monday on a threat of new sanctions against Iran and as Tropical Storm Dolly headed into the Gulf of Mexico, prompting a hurricane watch for parts of Texas and Mexico.
U.S. Light, sweet crude for August delivery added $2.16 to settle at $131.04 a barrel on the New York Mercantile Exchange. It was oil's first gain in a week.
In London, September Brent crude rose $2.91 to $133.10 a barrel on Monday on the ICE Futures exchange.
For drivers in the U.S., pump prices eased by a few precious pennies following last week's spectacular drop in oil prices. A gallon of regular gasoline now sells for an average just shy of $4.07, according to auto club AAA, the Oil Price Information Service and Wright Express. Diesel prices also pulled back, to an average of $4.818 a gallon.
Retail prices may decline even more in the coming days as gas station operators catch up to last week's four-day sell-off, which left oil more than $18 below the trading record of $147.27 it hit on July 11.
"If the futures market stays relatively flat this week, we could see some further declines at the pump," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.
Energy traders bid oil prices up after a weekend meeting between Iran and six world powers, including the U.S., failed to break the deadlock over Iran's disputed nuclear program.
In her first public comments since Saturday's meeting in Switzerland, U.S. Secretary of State Condoleezza Rice accused Iran of not being serious at the talks despite the presence of a senior U.S. diplomat, and warned it may soon face new sanctions. The six nations have given Tehran a two-week deadline to freeze suspect activities and start negotiations or be hit with new penalties.
Iran is OPEC's second largest oil producer and No. 2 in terms of the world's natural gas reserves.
Investor perception about the likelihood of conflict between Iran and the West has been a major reason for oil's rise in recent months. Traders fear Tehran could respond to an attack aimed at halting uranium enrichment by blocking oil supplies in the strategically situated Straight of Hormuz, a passageway that handles 40 percent of the world's tanker traffic.
"The buying has picked up ... as U.S. traders return to their desks after a weekend in which the only outcome to the much-anticipated talks in Geneva between Iran and the West was disappointment," Addison Armstrong, Tradition Energy's director of market research, said in a research note.
Oil prices also rose Monday on concerns that Tropical Storm Dolly may disrupt oil operations in the Gulf of Mexico.
Royal Dutch Shell began evacuating workers from some of work sites in the western part of the Gulf, although it said it did not expect Dolly to affect production.
"You see oil companies evacuate personnel ... that will lend support to prices," said John Kilduff, senior vice president for risk management at MF Global in New York. He predicted other companies would pull workers off rigs as a precaution, even though the storm likely posed little serious threat to rigs in the Gulf.
Dolly drenched Mexico's Yucatan Peninsula and headed into the warmer waters of the Gulf, packing sustained winds near 50 mph. The National Weather Service predicted it could reach hurricane strength by Tuesday.
A tropical storm warning was in effect for Mexico's Yucatan Peninsula from the Belize border to Campeche.
AccuWeather.com predicted the storm would not affect U.S. oil and natural gas platforms in the Gulf despite the likelihood of rough seas. However, Dolly could hit rigs operated by Mexican national oil company Petroleos Mexicanos in the Bay of Campeche, the forecasting company said.
The impending expiration of the current oil contract likely added to volatility, analysts said. September oil, which will become what is known as the front-month contract following Tuesday's close, was trading up $1.62 to $131.09.
Natural gas prices, which have fallen sharply since early this month, continued their slide. August futures fell 9 cents to $10.48 per 1,000 cubic feet on the Nymex.
Kilduff attributed the ongoing sell-off in part to the weakening U.S. economy, which has cut industrial demand for the fuel, and a surprisingly large increase in storage levels last week. Technical models used to gauge pricing support levels, he added, "have completely broken down," giving traders little reason to be bullish for the time being.
In other Nymex trade, heating oil futures rose 5.64 cents to settle at $3.7479 a gallon while gasoline futures rose 4.62 cents to settle at $3.2171 a gallon.