Brent crude futures rose above $108 a barrel on Tuesday as fresh sanctions on Iran raised the prospect of political instability in the region, offsetting the effect on the oil price of worries about the health of Western economies and their fuel demand.
ICE Brent crude January futures rose $1.45 to $108.33 a barrel by 1445 GMT, after falling for four consecutive sessions. Brent has risen 13 percent this year, and is set for a third annual gain.
U.S. January crude futures were $1.52 firmer at $98.44 a barrel by the same time, having risen to an intra-day high of $98.49 a barrel, after three sessions of losses.
"There is geopolitical risk after Western countries intensified pressure on Iran, cutting financial links and also putting sanctions on the oil industry," Commerzbank oil analyst Carsten Fritsch said. "This increases the risk of supply disruptions either directly from Iran or transported via the Strait of Hormuz, which carries one third of seaborne oil."
Investors fear oil prices could spike in the event of air strikes on Iran's nuclear sites, which could cut supply from OPEC's second largest crude producer and disrupt trade in the Strait of Hormuz, the world's most important oil transit channel.
"I don't expect at all to see Israel coming out with some action here at the end of the day; I read it more as a political play," said DNBNOR's Torbjrn Kjus.
He said the saber rattling was to get more Western countries to unite behind further sanctions.
The uncertainty has supported prices, under pressure from the worsening debt crisis in Europe and the United States that is expected to hurt economic growth.
Analysts expect that liquidity in the oil market will however dry up ahead of the long U.S. holiday weekend.
GEOPOLITICAL RISK RETURNS
OPEC Secretary General Abdullah al-Badri said on Tuesday the global oil market was balanced and prices were "comfortable.
On the supply front, Iran dismissed the new sanctions as propaganda, adding they would not stop it exporting petrochemicals to the European Union.
Stockpile watchers await the latest weekly oil data from the American Petroleum Institute due at 4:30 pm. EST (2130 GMT). A Reuters poll of analysts forecasts a fall in U.S. crude oil and distillate stocks last week while gasoline stockpiles rose.
World equities took a hit on Monday as fears about the ability of politicians on either side of the Atlantic to tackle huge debt burdens sapped investor confidence in riskier assets.
A "super committee" of U.S. lawmakers failed to reach agreement on a deficit-cutting plan while risk premiums on Spanish, Italian, French and Belgian government bonds rose as investors fled to safe-haven German Bunds.
"The big concern now is whether U.S. politicians will stall an economy that is starting to recover," ANZ analysts, led by Mark Pervan, said in a note.
Even China's economy faces growing risks from Europe's sovereign debt crisis and from debt held by local Chinese governments, the World Bank said, but it could engineer a soft landing by easing monetary policy.