Oil prices surge over 2%, settling at $69.25, as Hurricane Florence approaches US East Coast

Oil prices jumped on Tuesday as the U.S. east coast braced for a major hurricane.

U.S. light crude settled up 2.5 percent to $69.25 per barrel, while Brent crude surged 2.2 percent to $79.10.

Hurricane Florence maintained Category 4 strength as it approached North Carolina and South Carolina. The storm is expected to make landfall later this week. It could also be the worst storm to hit North Carolina in 60 years.

"This is people buying ahead of the storm, even though it is misplaced," said John Kilduff, founding partner at Again Capital. "Gasoline is leading the way. It's the demand surge we're seeing as people try to get out of the way of the storm. … At times like this people will buy to make sure they're covered."

RBOB gasoline futures for October delivery jumped 2.2 percent to $2.0007 per barrel.

"There were worries about whether it would affect the Colonial Pipeline which is a big product pipeline to the northeast," said Gene McGillian, vice president of research at Tradition Energy. He said gasoline did lead the market higher and there could be concern about Florence, but in reality the hurricane should create demand destruction.

Crude also got a boost as U.S. sanctions squeezed Iranian crude exports, tightening global supply despite efforts by Washington to get other producers to increase output.

"The impact of the U.S. sanctions on Iran is firmly being felt," said Tamas Varga, analyst at London brokerage PVM Oil. "The biggest worry is obviously the amount of Iranian oil that is disappearing from the market."

Washington has told its allies to reduce imports of Iranian oil and several Asian buyers, including South Korea, Japan and India appear to be falling in line.

But the U.S. government does not want to push up oil prices, which could depress economic activity or even trigger a slowdown in global growth.

U.S. Energy Secretary Rick Perry met Saudi Energy Minister Khalid al-Falih on Monday in Washington, as the Trump administration encourages big oil-producing countries to keep output high. Perry will meet with Russian Energy Minister Alexander Novak on Thursday in Moscow.

Russia, the United States and Saudi Arabia are the world's three biggest oil producers by far, meeting around a third of the world's almost 100 million barrels per day (bpd) of daily crude consumption.

Their combined output has risen by 3.8 million bpd since September 2014, more than the peak output Iran has managed over the last three years.

Russian Energy Minister Alexander Novak said on Tuesday that Russia and a group of producers around the Middle East which dominate the Organization of the Petroleum Exporting Countries may sign a new long-term cooperation deal at the beginning of December, the TASS news agency reported. Novak did not provide details.

A group of OPEC and non-OPEC producers have been voluntarily withholding supplies since January 2017 to tighten markets, but with crude prices up by more than 40 percent since then and markets significantly tighter, there has been pressure on producers to raise output.

As Middle East markets tighten, Asian buyers are seeking alternative supplies, with South Korean and Japanese imports of U.S. crude hitting a record in September.

U.S. oil producers are seeking new buyers for crude they used to sell to China before orders slowed because of the trade disputes between Washington and Beijing.

This is one reason that the discount for U.S. crude versus Brent has widened to around $10 per barrel, the biggest since June, traders said.

—CNBC contributed to this report.