Oil rose more than $1 on Wednesday as escalating tensions between the West and Iran stoked crude supply concerns from the world's No 4 exporter. Rumours of a naval clash between Iran and US or British military forces, quickly denied by Washington and London, briefly pushed US crude up around 8 percent to $68 per barrel late Tuesday.
US crude settled up $1.15 at $64.08 a barrel, the highest settlement since September 11, 2006. It slipped off an early peak of $64.96 after US weekly inventory data showed a smaller-than-expected draw in US gasoline stocks last week.
London Brent crude settled $1.18 higher at $65.78 a barrel. The rise extended a six-day rally that has added about 10 percent to prices, pushing them nearer the danger zone for consumer nations who fear they could stymie economic growth.
US officials denied market rumours of a clash with Iran, while Britain denied another rumour that it had sent troops to release 15 British sailors and Marines being held by Iran.
"Although it didn't happen this time, people think it could happen," said Christopher Bellew of Bache Financial of concerns that conflict had broken out between Iran and the West. Equity markets fell on the Iran tensions and took another dive after Federal Reserve Chairman Ben Bernanke said uncertainties about the US economic outlook had increased.
"The main equity markets remain on fragile feet, we are not sure of their ability to withstand a surge in oil prices," said Olivier Jakob, of oil consultancy Petromatrix. Weekly US oil inventory data showed a seventh-straight fall in gasoline stocks in the world's biggest consumer as it prepares for peak summer demand.
But a drop of 300,000 barrels of gasoline in the week ending March 23 fell short of analysts' forecasts for a 1.8-million-barrel draw. Gasoline has been leading the oil market higher as US supplies have dropped steadily ahead of the peak demand season.
Crude oil stocks fell by 900,000 barrels compared with forecasts for a rise of 1.6 million barrels. "The lower-than-expected gasoline draw is a sign that gasoline production is picking up," said Eric Wittenauer, an analyst at broker A.G. Edwards.
In Europe, a strike by workers at the French Mediterranean oil terminal Fos-Lavera, entering its third week, has begun to hit refinery output and also raised concerns over Europe's ability to export fuel to the United States.
Oil's surge to $68.09 on Tuesday was its highest since September 6 and highlighted anxiety over supplies from the Gulf and Opec member Iran. So far there has been no disruption to Iran's daily shipments of around 2.2 million barrels.
The rumours surfaced as a second US aircraft carrier moved into the Gulf to carry out military exercises. Iran's navy began a week of exercises in the Gulf last Thursday. Iran said it would free a woman who was among the 15 British sailors later on Wednesday or Thursday.