Exchange traded funds tracking movements in crude oil prices rallied 4% on the first trading day of the year after Iran produced its first nuclear fuel rod and on speculation of a forced response from Western countries.

U.S. Oil Fund (NYSEArca: USO) tracks futures based on light, sweet crude oil delivered to Cushing, Okla. The fund was up 4.15% at the end of Tuesday.

WTI crude futures rose 4.25% Tuesday, lifting oil prices to $103 per barrel. The oil ETF slipped fractionally in Wednesday’s premarket.

According to the Iranian Students new Agency, Iran produced its first nuclear fuel rod, which was inserted to Tehran’s atomic-research reactor, Bloomberg reports.

“Fear trade is back because of Iran,” Adam Klopfenstein, a market strategist at Archer Financial Services Inc., said in the Bloomberg article.

The U.S. and the U.N. have placed sanctions on Iran in an attempt to dissuade the country from advancing its nuclear enrichment plans, to no affect. In response, Iran has warned that it will block the Strait of Hormuz, a key oil tanker lane.

Recently, Iran has been conducting naval maneuvers and mock scenarios to simulate closing down the Strait, reports Bradley Klapper and Robert Burns for the Associated Press.

Iran also warned the U.S. from taking further actions in the region, which helped push oil prices to their highest in almost eight months, report Viola Gienger and Heather Langan for Bloomberg.

“We usually don’t repeat our warning, and we warn only once,” head of Iran’s army, Ataollah Salehi, said. “We recommend and emphasize to the American carrier not to return to the Persian Gulf.”

The oil ETF ended 2011 with a slight loss.

U.S. Oil Fund

For more information on oil, visit our oil category.

Max Chen contributed to this article.

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