Oil prices rose on Wednesday after an Algerian gas field came under attack from Islamist militants and as data showed crude stocks fell in the United States last week.
Gains in the Brent contract were capped, however, by news of a restart of a North Sea pipeline system. The Brent February crude contract seesawed as it approached expiration at the end of Wednesday's session, eventually finishing 31 cents higher above $110.
The March contract pared its early gains after the operator of the Cormorant Alpha platform in the North Sea said it is preparing to restore the flow of an estimated 80,000 barrels per day (bpd) of crude oil in the Brent pipeline system.
A leak found on Tuesday halted production at the Cormorant Alpha platform and shut the pipeline system that handles production from oilfields that contribute to the Brent stream.
"Brent supply has been pretty unreliable over the past year," said Jason Gammel, a commodities analyst at Macquarie in New York. "Pipeline outages in the North Sea have been putting (upward) pressure on Brent prices."
The possibility of supply disruptions in Africa and the Middle East remain a supportive factor for oil after Al Qaeda-linked Islamists on Wednesday claimed to have seized up to 41 hostages, including seven Americans, in a raid on a gas field plant in OPEC-member Algeria.
"Given how successful Algeria has been at protecting its oil and gas installations over the decades, a raid like this was seen as fairly unlikely," said Sam Ciszuk, analyst with British-based consultancy KBC Energy Economics.
"Either the Islamist group got lucky, or it really demonstrates how their capabilities have grown," Ciszuk added.
The gas field is operated by a joint venture including BP , Norwegian oil firm Statoil and Algerian state company Sonatrach. BP said the attack had shut in more than 10 percent of Algeria's gas production and about 60,000 bpd of liquids.
The expiring Brent February crude contract rose 31 cents to settle at $110.61 a barrel, having traded from $110.24 to $110.84. March Brent finished 5 cents higher at $109.68 a barrel, having swung from $109.34 to $110.35.
U.S. February crude settled up 96 cents at $94.24 a barrel, having traded from $93.10 to $94.36. Its discount to front-month Brent fell to its lowest since September and finished below $16.50 a barrel.
Traders expect the recent expansion of the Seaway pipeline to help ease stocks of crude oil from record levels around Cushing, Oklahoma, delivery point of the U.S. benchmark contract.
The spread between the contracts for delivery in June has narrowed to around $12.50 a barrel, having started the year around $15 a barrel.
U.S. OIL INVENTORIES
U.S. commercial crude inventories fell 951,000 barrels last week, the weekly report from the Energy Information Administration said on Wednesday, contrary to consensus expectations that crude stocks had increased.
Crude stocks at Cushing rose by 1.78 million barrels to an all-time high of 51.86 million barrels, though inventories in the Gulf Coast refining hub fell as imports dropped by more than 300,000 bpd to less than 8 million bpd.
"Last week's temporary shut down of the Seaway pipeline to get ready for the expansion of capacity had a bigger impact than some expected," said Phil Flynn, analyst at Price Futures Group in Chicago.
"Saudi Arabia's recent production cuts probably helped cause the drop in crude imports," Flynn added.
U.S. gasoline stocks rose 1.91 million barrels and distillate stocks rose 1.69 million barrels, smaller builds than expected in a Reuters poll of analysts.
Separate reports on Wednesday showing U.S. manufacturing output climbed in December, while low inflation lifted consumer's purchasing power, also lent support to oil prices.
DEMAND CONCERNS REMAIN
In Europe, however, demand for new cars fell in December to the lowest level since 1995, adding to numbers the previous day showing Germany's economy shrank at the fastest pace in almost three years in the final quarter of 2012.
OPEC said it expected demand for its crude this year to be lower than initially thought because of higher supply from rival producers, indicating inventories could rise even after the recent output cut by Saudi Arabia.
Oil traders will be closely watching China's GDP numbers on Friday for another indicator of prospects for energy demand.
The data is expected to show the pace of China's economic growth improved to 7.8 percent in the fourth quarter, according to a Reuters poll, snapping seven straight quarters of slowing expansion.