Oil prices rose on Tuesday, with U.S. crude posting the biggest percentage rise since late October, on supportive economic data that also lifted the euro and equities, coupled with worries about potential supply disruptions in Iran and Kazakhstan.
U.S. stocks on Wall Street extended gains on signs of easing stress in Europe's bond markets as well as positive economic data at home and abroad. U.S. housing starts and building permits jumped to a 1-1/2-year high in November, boosting hopes that the housing market is entering a tentative recovery.
Iran has invited the U.N. International Atomic Energy Agency to visit for talks, after the IAEA's report last month pointed to military links to Tehran's nuclear program and as Iran faces tightening sanctions. Diplomats met in Rome on Tuesday to discuss further sanctions against Iran, including a possible European Union oil embargo against Tehran, diplomatic sources said.
"This rebound on Iranian headlines could be seen as a repeat of last Tueday's rally ... and could meet with a similar reversal ... absent an actual supply disruption," Tim Evans, energy analyst for Citi Futures Perspective in New York.
Oil rose 2 percent on Dec. 13 on concern Iran might shut the key Strait of Hormuz waterway, only to drop more than 4 percent the next day on revived euro zone debt crisis worries. Brent February crude rose $3.36 to $107 barrel by 2:52 p.m. EST (1952 GMT), ahead of its settlement and having reached $107.27.
Expiring U.S. January crude rose $3.34, or 3.34 percent, to settle at $97.22 a barrel, having reached $97.45 and pushing back above the 200-day moving average of $95.78. U.S. February crude rose $3.19 to settle at $97.24.
Crude futures trading volumes remained light as the Christmas holiday approaches. Brent's volumes were 20 percent below its 30-day average even while outpacing U.S. turnover. A sharp fall in Spanish borrowing costs boosted the euro along with a report showing German business sentiment rose sharply in December. The dollar index weakened 0.5 percent.
"An improved tone to the euro is being facilitated by a sharp drop in short-term Spanish yields," Jim Ritterbusch, president at Ritterbusch & Associates, said in a note.
"(T)he possibility of a European embargo on Iranian crude appears to be propping up Brent prices in relation to WTI (U.S. benchmark West Texas Intermediate crude)," Ritterbusch added.
Brent's premium to U.S. crude <CL-LCO1=R> remained near $10 a barrel. Key industrial metal copper neared a one-week high, also supported by the weaker dollar and the economic data.
SUPPLY DISRUPTION FEARS
Gulf Arab leaders meeting in Saudi Arabia endorsed Saudi King Abdullah's call to form a "single entity" after hinting at Iranian threats. The six-member Gulf Cooperation Council pledged closer military and security integration.
Developments in neighboring OPEC-producer Iraq after the departure of U.S. forces also have warranted oil-investor concern. Iraq issued an arrest warrant for Sunni Vice President Tareq al-Hashemi after the government obtained confessions linking him to what an official called terrorist activities.
Concerns about supply disruption extended to Kazakhstan where sacked workers demanded to know who ordered police to fire on protesters in the Central Asian state estimated to produce 1.6 million barrels per day (bpd) of crude, similar to Libya's output before its civil war.
U.S. OIL INVENTORIES
Ahead of fresh snapshots of U.S. oil inventories, crude stockpiles were expected to have fallen 2.3 million barrels last week, a Reuters survey of analysts showed. Distillate stocks also were expected to be lower, while analysts looked for gasoline stocks to be higher.
U.S. gasoline demand last week was off 4.4 percent from year ago, though posting a slight, 0.2 percent rise from the previous week, MasterCard said in a weekly report.
The weekly oil inventory report from industry group American Petroleum Institute is due at 4:30 p.m. EST (2130 GMT) on Tuesday, with the U.S. Energy Information Administration report following on Wednesday morning.
(Additional reporting by Gene Ramos and Jeffrey Kerr in New York, Simon Falush in London and Manash Goswami and Francis Kan in Singapore; Editing by Dale Hudson, David Gregorio)