Brent oil futures rallied for a second day on Thursday, rising more than 2 percent to a 10-month high above $126 after Israel said it would test-fire a ballistic interceptor missile, raising fears of a conflict with Iran. The unusual announcement further boosted oil prices already strongly higher on upbeat economic data from the United States and China and worries of Iran-related supply disruptions.
"This is another Brent-driven escalation trade," said Richard Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago. Ilczyszyn noted that Israeli leader Benjamin Netanyahu has said that if sanctions against Iran fail to work, US President Barack Obama will need to commit to putting more troops on the ground.
"We've already seen the WTI/Brent spread widen significantly today. (So we are seeing) more fuel (added) to the fire," Ilczyszyn said. US jobless claims fell last week, the latest sign that the labour market recovery was gaining momentum. The report trumped other data which showed the manufacturing sector cooled last month while construction spending fell in January.
That latest US data followed a report on Wednesday that showed the economy grew slightly faster than initially thought in the fourth quarter. "It's the economy," said Carl Larry, president of New York-based Oil Outlooks LLC. China's factories grew more than expected in February as new export orders for big companies bounced back, a government survey showed.
In London, ICE Brent crude for April delivery was up $3.15 at $125.81 a barrel by 2:15 pm EST (1915 GMT). It hit an intraday high of $126.18, the highest for front-month Brent since May 2. US April crude rose $1.77, or 1.65 percent, to settle at $108.84 a barrel, having traded from $106.55 to $108.90. Brent's premium against US crude widened to around $17.20 after closing at $15.59 on Wednesday.
Brent's trading volume rose more than 20 percent above its 30-day average while US crude volume was down 12 percent from its 30-day average, Reuters data showed. "The existing supply-side disruptions and risk of them getting worse are supporting prices - Iran and the continuing conflict in Syria," said Christoper Bellew, a broker at Jefferies Bache in London.
US President Obama said his administration will lay out as "many steps as we can" in coming weeks to unclog bottlenecks that are helping to push up the price of gasoline and other fuels. Western sanctions against Iran are already reducing crude shipments from the world's fifth-largest oil exporter, a US advisory body has found, amid warnings that any shortages will push up crude prices and strain a weak global economy.
However, US Energy Secretary Steven Chu said in Washington that global oil producers have enough spare production capacity to make up for Iranian exports curbed by the sanctions. Output from all 12 members of the Organisation of the Petroleum Exporting Countries rose last month to an average of 31.23 million barrels per day, from 30.95 million bpd in January, a Reuters survey showed on Wednesday. In the United States, crude oil inventories shot up a lot more than expected, by 4.2 million barrels to 344.9 million barrels in the week to February 24, government data showed.
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