SINGAPORE: Brent crude held above $110 on Wednesday on supply concerns as Iran renewed a threat to close the vital Strait of Hormuz while the demand growth prospect looks set to improve with positive economic indicators from Europe and the United States.
Markets were lifted after surveys showed that the euro zone may escape recession with a surprise pickup in services this month. The data showed Germany's service sector expanded at its fastest pace in seven months in January while services in France expanded at the fastest pace since August.
Across the Atlantic, the world's top oil consumer, the United States, appears to have shaken off the gloom and economists estimate gross domestic product grew at a 3.0 percent annual pace in October-December, according to a median Reuters poll.
Front-month Brent crude rose 39 cents to $110.42 a barrel by 0533 GMT, recouping most of the previous session's losses. US crude gained 12 cents to $99.07, after settling below the 50-day moving average of $99.19.
"We are looking at a relatively healthy demand scenario, and yesterday's manufacturing data encapsulated that scenario," said Ric Spooner, chief market analyst at CMC Markets.
"On the other side of the coin, we see a tightly supplied market with limited spare capacity."
While the demand outlook improves, investors are worried about supply disruption with Iranian politicians repeating a threat to close the vital sea link if the West succeeds in preventing Tehran from exporting crude.
President Barack Obama warned Iran on Tuesday the United States would keep up pressure on its disputed nuclear programme.
"America is determined to prevent Iran from getting a nuclear weapon, and I will take no options off the table to achieve that goal," he said in his State of the Union address.
SUPPLY, DEMAND OUTLOOK
Apart from Iran, markets are also supported by supply concerns from Africa after South Sudan blamed an air strike on a refugee camp on Sudan. The blame followed South Sudan accusing its former civil war foe of seizing $815 million worth of crude.
South Sudan seceded from Sudan in July under a 2005 peace deal that ended decades of civil war, but the two countries have remained at loggerheads over issues including oil, debt and fighting along the poorly drawn border.
"Ultimately, this is about the sharing of economic rent from a resource-in a diversified economy this would be a minor issue, but in Sudan and South Sudan it is of vital national economic importance," analysts at JPMorgan said in a report.
"It would be a surprise if it did not take a considerable time to reach a stable, long-term agreement."
Yet, against the backdrop of an improving demand outlook and concerns over supply, worries about Europe weighed on prices.
A debt crisis at Greece persists and plans for restructuring of Greece's debt have been sent back to the drawing board, raising the chances of a messy default.
"Greece is the word across the globe at the moment with no indication that they will be in a position to meet its March 20 bond payment obligations," said Ben Le Brun, market analyst at OptionsXpress, in a report.
Prices were also capped by industry data showing US crude stockpiles rose unexpectedly due to a jump in imports.
US crude stockpiles rose 7.3 million barrels in the week to Jan. 20, well over analysts' expectations for a build of 800,000 barrels. The increase came as imports shot up 575,000 barrels per day to 8.47 million bpd.
Oil investors are also awaiting results of the US Federal Reserve's two-day policy meeting, the first of 2012. The Fed, which will start a new practice of announcing policymakers' interest-rate projections, will probably conclude the meeting with a signal that interest rates will be held near zero into 2014, according to a Reuters poll.
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