Oil hit a record $72.64 a barrel on Tuesday as Iran defied world pressure to halt its nuclear program, raising new fears of a cut in supplies from the world's fourth-biggest crude exporter.
In London, North Sea Brent crude oil jumped $1.18 to set its all-time high as Iran and the West exchanged increasingly sharp words over the Islamic Republic's determination to push ahead with uranium enrichment.
US crude oil climbed to $71.60, smashing through its previous record of $70.85.
"This is a bull market and we have not found a top yet," said Tom Bentz, a senior analyst at BNP Paribas Commodity Futures in New York.
Prices fell back slightly in later trade, with Brent, an indicator of the cost of Europe's oil imports, settling up $1.05 to $72.51, while US crude settled up 95 cents at $71.35. High US oil stocks have helped to push US crude below Brent.
"The current shoot up we are experiencing is as a result of the Iran problems and it's not helped by the flare up between Israel and the Palestinians," Opec President Edmund Daukoru said on Tuesday.
"But mainly it's the threatening statements being made against Iran as a result of its nuclear program," added Daukoru, who is also Nigeria's oil minister.
Nigerian output is also a major concern.
Oil prices have soared from $20 at the start of 2002 and are nearing the inflation-adjusted peaks of over $80 hit in 1980, the year after the Iranian revolution.
Initially fired by strong demand from the United States and the fast-growing economies of China and India, the rise has accelerated over the past year on worries over supplies.
Iraq's once significant oil industry is in crisis, Nigerian exports have been slashed by rebel attacks on the world's eighth-biggest exporter and consumers are worried that Iran's exports could fall victim to its nuclear dispute with the West.
The rally has also been aided by big investment funds putting their money into commodities in the hope of higher returns than they get from equities or bonds.
President Mahmoud Ahmadinejad declared Iran a nuclear power last week, saying it had enriched uranium to the level used in power stations. Tuesday, he delivered a warning to any nation considering attacking his country.
"Today, Iran's army is one of the most powerful armies in the world and it will powerfully defend the country's political borders and the nation," Ahmadinejad said in a speech during an armed forces parade.
"It will cut off the hands of any aggressors and will make any aggressor regret it," he added.
The United States has said it wants a diplomatic solution to the stand-off but has not ruled out a military option.
It is expected to push for targeted sanctions against Iran when it meets the UN Security Council's other permanent members - Britain, France, China and Russia - plus Germany.
The disruption to Nigeria's crude output will become more critical as the US driving season begins next month.
Nigeria is a major supplier of gasoline-rich crude oil to the United States. Analysts reckon gasoline stocks in the world's top oil user fell again last week.
"Under the wrong circumstances, you could easily see $80 being broken or even higher than that," said Kevin Norrish, an analyst at Barclays Capital. "Any major loss of production is going to give us another major push up."
Ministers from the Organisation of the Petroleum Exporting Countries, who will gather informally this weekend during an International Energy Forum meeting in Doha, have said there is nothing more the group can do to bring down prices.
For over a year Opec has been pumping close to its limit.
"It is obvious that Opec does not have a magic wand ... Opec is doing all it can regarding oil production," Qatari Oil Minister Abdullah al-Attiyah told Qatar's state news agency QNA.
Algerian Energy and Mining Minister Chakib Khelil said prices could stay high until the end of the year.
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