Oil prices closed up on Wednesday amid ongoing tensions between the West and Iran over the detaining of 15 British navy personnel.
Tensions with Iran have pushed up oil prices
Brent Crude rose $1.18 a barrel to hit $65.78 while US light, sweet crude oil was up $1.15 to $64.08.
Britain said satellite data showed that Navy workers seized by Iran had been in Iraqi waters - which Iran denies.
Official visits to Iran will cease and business will be suspended until the dispute is resolved, Britain said.
"No government to government business will be transacted on any other issue," the a spokesman said.
Britain also said it would stop issuing visas to Iranian officials.
According to UK defence officials, the 15 navy personnel were 1.7 nautical miles inside Iraqi waters when they were seized.
Such geopolitical instability would start to weigh heavily on oil prices, said Phil Flynn of Alaron Trading in Chicago.
"The risk to be involved with oil has gone up dramatically in just a couple of days," he said.
"You wonder if this incident is going to be the first or the last."
The incident has served to aggravate relations between the West and Iran, which have been deteriorating following disagreements regarding Iran's nuclear programme.
Iran says its nuclear programme is for civilian purposes only while the US argues it is to develop nuclear weapons.
The UN Security Council voted on Saturday to increase sanctions on Iran over the country's nuclear programme.
On Tuesday, US crude oil hit a six-month high of $68 on speculation that the West and Iran had come to blows militarily - something which was swiftly denied by the US.
But analysts remain concerned that continued tension with Iran will continue to have an impact on oil prices.
"Oil prices surging above $68 was a temporary phenomenon but it shows that the market is on high alert for geopolitical factors," said Takeda Makoto, analyst at Bansei Securities.
Mr Makoto said oil prices were now likely to range between $62 and $65 a barrel.