Oil held around $112 (Dh411) a barrel yesterday, supported by fears of possible supply disruptions from Iran and by strong economic data from the United States and China.
Oil prices surged on Tuesday as Iran threatened to choke off crude shipments through the strategic Strait of Hormuz in retaliation against tougher sanctions from the West over its nuclear programme.
Brent February crude rose 4 cents to $112.17 barrel by 10.40 GMT, after rising more than 4 per cent on Tuesday to settle at the highest since November 15. This represented the biggest one-day gain since last May. US February crude was down 20 cents to $102.26 a barrel, following its highest close since May 10.
However, sluggish demand, particularly in Eur-ope, could be put under further pressure by prices at these levels, Olivier Jakob, analyst at Petromatrix in Zug, Switzerland, said.
"Iran is the supporting factor, but these price levels will hurt the economy, Europe oil demand with prices at these levels will be a total disaster." He added that the euro's recent weakness against the dollar was making oil particularly expensive in the region, equivalent to $133 per barrel in 2008 terms.
Tensions between Iran and the West heightened further after Tehran issued its most aggressive statement yet as new US and EU financial sanctions take a toll on its economy. Tehran threatened to take action if the US Navy moved an aircraft carrier into the Gulf but the US dismissed it, saying it would keep sending carrier strike groups through the Gulf.
Is Iran's rhetoric serious?
However, many think the chance of Iran following through with its threats is fairly remote, and that prices will begin to reflect this.
"I don't think anyone thinks that Iran has anything to gain by doing it, and they will hurt themselves and their relationship with China," Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong, said.
US commercial crude oil stockpiles were expected to have fallen last week as refiners drew down inventories and limited imports to lower their year-end taxes requirements, a preliminary Reuters poll ahead of weekly supply data showed on Tuesday.