LONDON: Crude oil rose above $110 a barrel on Tuesday as tension between Iran and the United States stirred fear of a possible disruption to oil supplies from the Middle East and as Chinese data showed economic activity increasing.
Oil was one of the best performing assets in 2011, with North Sea Brent posting an annual gain of 13 percent, to a record average of nearly $111 a barrel, as unrest in North Africa and the Middle East disrupted supply.
The market began the new year strongly on signs of rising demand from emerging economies and supply concerns.
ICE Brent crude futures climbed $2.97 to a high of $110.35 a barrel by 1145 GMT on Tuesday, the first day of trading for 2012. U.S. crude futures were up $2.70 at $101.53 a barrel after hitting an intraday high of $101.68.
Military exercises in the Gulf by Iran and the movement of U.S. naval vessels in the area has raised fears of a confrontation between Tehran and Washington that could cut off oil exports from the region.
Iran has said it could shut the Strait of Hormuz, through which 40 percent of world oil is shipped, if sanctions were to be imposed on its crude exports.
Iranian state news agency IRNA on Tuesday quoted army chief Ataollah Salehi as saying Iran would take action if a U.S. aircraft carrier returned to the Gulf.
The Iranian semi-official Fars news agency quoted Salehi as recommending and warning the United States against the return of the carrier, which had left the area because of Iran’s naval exercises: "Iran will not repeat its warning."
Carsten Fritsch, commodities analyst at Commerzbank in Frankfurt, said the Iranian military maneuvers and comments had added to the risk premium for oil and other commodities.
"The risk premium is supporting oil prices," Fritsch said.
Olivier Jakob at consultants Petromatrix in Zug, Switzerland, said markets were rattled by the increasing level of rhetoric on both sides of the Strait of Hormuz.
"Some of the rhetoric can at times be part of a public relations show, but it can quickly spin out of control," Jakob said. "In this environment of increasing tensions and rhetoric, global asset managers are unlikely to give up their long exposure to oil."
Activity at big Chinese manufacturers expanded slightly in December, temporarily putting to rest fears that the world’s second-largest economy could slow sharply in the wake of the euro zone crisis and hurt oil demand.
The official Purchasing Managers Index for non-manufacturing sectors rebounded strongly to 56.0 from 49.7 in November, data showed on Tuesday.
Victor Shum, oil consultant at Purvin & Gertz, said the direction of the oil market would be determined over the next few months by a balance of economic issues in Europe and the US versus bullish geopolitical factors and the reality of economic growth in major Asian economies.
"Oil in 2012 will see a continuing strengthening trend as there are more upside risks," he said, adding that he expected Brent to average $110 and U.S. crude $105 a barrel this year.
Brent crude is expected to average $105 a barrel in 2012, lower than 2011’s $111, on worries about the impact of the euro zone crisis on economic growth, a Reuters poll found.
"This expansion in manufacturing data has helped change sentiment in the market on the first day of trading," Shum said.
The West has moved closer towards tougher sanctions against Iran over its nuclear program, ratcheting up concerns of a supply cut from OPEC’s second largest producer.
US President Barack Obama signed a law on Saturday imposing tougher financial sanctions that could for the first time hurt Tehran’s oil exports, while the European Union is due to consider similar steps soon.
Iran test-fired what it described as two long-range missiles at the end of a 10-day naval exercise in the Gulf.
"It’s mostly saber-rattling," Shum said. "Whether Iran would actually blockade the Strait of Hormuz remains to be seen."
"The West will commit to maintain oil flows through the Strait of Hormuz," he said. –Additional reporting by Florence Tan in Singapore