US crude futures rose above $87 a barrel as tensions in Egypt intensified after president Hosni Mubarak said he would transfer powers to his vice president but would not immediately step down as demanded by protesters.
Increasingly sour confrontation after 17 days of unrest has raised fears of violence in the most populous Arab nation, a key US ally in an oil-rich region where the chance of disorder spreading to other repressive states has troubled world markets.
US crude for March delivery gained 53 cents to $87.26 a barrel by 0705 GMT. Brent crude for March delivery rose 39 cents to $101.26 a barrel.
The wider gains in US crude helped narrow its discount to Brent by about $2 to around $14.00 after it hit a record of $16.09 a barrel.
"Yesterday, there were the ups and downs of hopes that the situation in Egypt was going to be resolved, but that did not happen," said David Cohen, economist at Action Economics in Singapore. "So, there's still a degree of uncertainty hanging. The politics in Cairo remains a source of pressure on oil prices."
About 3.1 million bpd of oil and refined petroleum products are shipped through the Suez Canal and Egypt's SUMED pipeline, according to the head of the US Energy Information Administration (EIA) Richard Newell.
However, Mr Newell told a congressional hearing that there was enough spare shipping capacity worldwide to move 4 million to 5 million barrels per day of oil if protests in Egypt shut down the Suez Canal and the country's major pipeline.
Egypt has been wracked by weeks of protests over the continued rule of Mr Mubarak and workers this week went on strike at companies owned by Suez Canal authorities. But so far the waterway has not been affected.
Oil prices also rose yesterday following rumours about the health of Saudi Arabia's King. But its foreign minister Prince Saud al-Faisal dismissed them, saying King Abdullah bin Abdul-Aziz was alive and in "excellent shape"
King Abdullah, around 87, has been resting in Morocco since January following a two-month stay in the United States where he underwent surgery twice after a blood clot complicated a slipped disc, state media have said.
On oil supplies, the Organisation of the Petroleum Exporting Countries (Opec) said yesterday it raised output to a two-year high in January, the latest sign that a recovering world economy and oil prices of $100 a barrel are encouraging extra supplies from the producer group.
In a monthly report, Opec said January production rose by 400,000 barrels per day (bpd) to 29.72 million bpd, the highest since December 2008 when the group announced a record cut in its output.
The higher Opec production and comfortable oil stocks in developed nations should limit a further oil price spike despite demand hitting an all-time high later this year, the International Energy Agency (IEA) said.
"I think there is still enough production capacity, but we are not going to approach the (peak) levels of 2008, at least not this year," said Mr Cohen. "The underlining demand is still undergoing. I do not think the tightening by the Chinese central bank is going to alter the outlook for continual growth in China and other emerging economies, and these will be supportive of oil prices going forward."
In the US, data was positive with new applications for unemployment benefits dropping to a 2-1/2-year low last week, pointing to a stronger footing for the labour market as the economic recovery gathers momentum.
Initial claims for state unemployment benefits fell 36,000 to a seasonally adjusted 383,000, the lowest since early July 2008, the Labor Department said.
However, persisting high crude oil prices at above $100 a barrel could hurt Europe's economic recovery, said a spokeswoman for European Union energy commissioner Guenther Oettinger yesterday.
Reuters
