LONDON: Brent crude prices firmed on Monday, trading above $113 a barrel, lifted by Iran's threat to shut a key oil-shipping route although worries over the economic health of the euro zone kept gains in check.
Iranian officials have in recent weeks threatened to block the Strait of Hormuz if new sanctions imposed by the United States and planned by the European Union, with the aim of discouraging Iran's nuclear programme, harm Tehran's oil exports.
"Overall the geopolitical premium is supporting amid tensions with Iran, but on the other hand the price of crude in euros remains high and will hurt demand in Europe," Olivier Jakob from Zug-based consultancy Petromatrix said.
February Brent crude futures were 34 cents higher at $113.40 a barrel by 0945 GMT, after gaining more than five percent last week. On the New York Mercantile Exchange, February US light crude futures were up 10 cents at $101.66 a barrel.
"Brent has risen to nearly $114 a barrel on the back of supply risks," Commerzbank analysts said in a note. "The nuclear dispute between the West and Iran is also increasingly prompting money managers to pin their hopes on rising prices again".
Gains were however capped by economic woes in Europe, where retail sales in the euro zone fell 0.8 percent in November, much weaker than a Reuters poll forecast for a fall of 0.2 percent, while the number of unemployed rose for the seventh consecutive month.
German Chancellor Angela Merkel and French President Nicolas Sarkozy, aiming to align the two powerhouse partners that have driven European integration, will focus on how to boost employment at a meeting later in the day.
"I don't think there are big expectations from the meeting. They have met so many times and achieved nothing," said Ben Le Brun, market analyst at OptionsXpress in Sydney.
IRAN FACE-OFF
The West has plans to use strategic oil stocks to offset most of the 16 million barrels per day (bpd) of crude passing through the Strait of Hormuz should Iran block it, industry sources and diplomats told Reuters.
The International Energy Agency (IEA) may release up to 14 million barrels per day (bpd) of government-owned oil stored in the United States, Europe, Japan and other importers, a rate that could be kept up for a month.
Such a release is likely to limit the impact of any blockade of the Strait of Hormuz, which is unlikely to last beyond a few weeks, analysts at Morgan Stanley said in a report.
"If the impact is limited to 10 million bpd for three weeks, or 210 million barrels, this loss could be easily replaced by an SPR (strategic petroleum reserves) crude release until the Strait is reopened," the report said.
Tensions between Iran and the West are likely to escalate after Iran's Revolutionary Court sentenced an Iranian-US man to death for spying for the CIA, the semi-official Fars news agency reported on Monday.
INDEX RE-WEIGHTING
Markets will also be affected this week by the reweighting of the world's biggest commodity indexes, the S&P GSCI Index and the DJ-UBS Index.
This could see funds selling off more than $6 billion worth of US crude futures and buy up more than $5.4 billion of Brent crude, analysts estimate, likely creating short-term tremors in the market.
Expectations of the re-weighting, which was announced two months ago to better reflect market fundamentals, led to the closely watched Brent/WTI spread expanding nearly $3 a barrel last week to near its widest point since mid-November. The spread tightened by 35 cents to $11.74 by 0948 GMT.
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