LONDON (Reuters) - Oil fell slightly on Wednesday but was not far from seven-week highs set earlier in the session, supported by fears of possible supply disruptions from Iran and by strong economic data from the United States and China.
Brent February crude fell 66 cents to $111.47 barrel by 1040 GMT. U.S. February crude was down 66 cents to $102.30 a barrel, following its highest close since May 10.
Oil prices had surged more than 4 percent on Tuesday, the biggest one-day percentage gain since last May, as Iran threatened to choke off crude shipments through the strategic Strait of Hormuz in retaliation against tougher sanctions from the West over its nuclear program.
Prices at these higher levels could put further downward pressure on already sluggish demand, particularly in Europe, said Olivier Jakob, analyst at Petromatrix in Zug, Switzerland.
“Iran is the supporting factor, but these price levels will hurt the economy. Europe oil demand with prices at these levels will be a total disaster.”
He added that the euro’s recent weakness against the dollar was making oil particularly expensive in the region, equivalent to $133 per barrel in 2008 terms.
Tensions between Iran and the West heightened after Iran issued its most aggressive statement yet as new U.S. and EU financial sanctions take a toll on its economy.
Tehran threatened to take action if the U.S. Navy moved an aircraft carrier into the Gulf, but the United States dismissed it, saying it would keep sending carrier strike groups through the Gulf.
Many people in the market say the chance that Iran will follow through with its threats is fairly remote and that prices will begin to reflect this.
“I don’t think anyone thinks that Iran has anything to gain by doing it, and they will hurt themselves and their relationship with China,” said Jeremy Friesen, a commodity strategist at Societe Generale in Hong Kong.
Political risk from Kazakhstan was also supporting oil prices, with President Nursultan Nazarbayev on Wednesday extending until January 31 a state of emergency in the western oil city of Zhanaozen, where at least 16 people were killed last month.
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Stronger-than-expected economic data from the United States, Germany and China buoyed demand-sensitive assets including oil.
U.S. manufacturing grew at its fastest pace in six months in December, and U.S. construction rose to a near 1-1/2-year high in November, lifting hopes that oil demand in the world’s largest consumer will improve.
The downturn in the euro zone’s vast private sector economy eased slightly towards the new year thanks to an upturn in Germany, the latest purchasing manager’s index showed.
“The economy news is stronger, the German PMIs were stronger, and Iran is keeping us on our toes,” said Rob Montefusco, at Sucden Financial.
The industry group American Petroleum Institute’s inventory data is due at 2130 GMT on Wednesday, with the U.S. Energy Information Administration data following on Thursday.
U.S. commercial crude oil stockpiles were expected to have fallen last week as refiners drew down inventories and limited imports to lower their year-end taxes requirements, a preliminary Reuters poll ahead of weekly supply data showed on Tuesday.
Additional reporting by Florence Tan in Singapore; editing by Jane Baird