The U.S. Navy warned that any disruption of traffic through the vital Strait of Hormuz "will not be tolerated."
In New York, benchmark crude fell $1.98, or about 2 percent, to finish at $99.36 a barrel.
Brent crude fell $1.71 to end at $107.56 a barrel in London.
On Tuesday, Iran's vice president said that his country was ready to close the Strait of Hormuz -- a vital waterway through which a third of the world's tanker traffic flows -- if Western nations embargo the country's oil because of Iran's ongoing nuclear program. The head of the country's navy added Wednesday that his fleet can block the strait if need be. His comments came as Iran held a 10-day drill in international waters near the strategic route, which is 21 miles wide at its narrowest point.
A Saudi oil ministry official told The Associated Press that Saudi Arabia and other Gulf producers are ready to provide more oil if Iran tries to block the strait. The official spoke on condition of anonymity because he was not authorized to discuss the issue. He didn't specify other routes that could be used to transport oil, although they would likely be longer and more expensive for the region's customers.
"Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated," said Lt. Rebecca Rebarich, a spokeswoman for the U.S. Navy's Fifth Fleet. -- AP