LONDON: Brent crude oil rose to $108 on Thursday as violence in Iraq and news of Iranian navy maneuvers in the Gulf raised fears of disruption to oil supplies and kept tension high across the region.
A rash of bombings hit Baghdad on Thursday, killing at least 57 in the first big attack on Iraq's capital since a crisis between its Shi'ite Muslim-led government and Sunni rivals erupted after the withdrawal of U.S. troops.
The bombings followed a move by Prime Minister Nuri al-Maliki to sideline two key Sunni Muslim leaders in the country, which pumped 2.67 million barrels per day in November, according to a Reuters survey.
Underlining risk in the Gulf, Iranian state television quoted a navy commander as saying the Islamic Republic's navy will launch war games in the Strait of Hormuz on Saturday.
The 10-day exercise will be run over an area from east of the Strait of Hormuz to the Gulf of Eden.
Analysts say Gulf tension and worries about supplies from producers such as Iraq and Kazakhstan and the possibility that sanctions could curb Iranian oil exports are all supporting prices.
In Kazakhstan, KazMunaiGas Exploration Production said it expected to meet a reduced oil production target for the year after police deployed armed security around the oilfield closest to the scene of this week's riots.
"Geopolitical developments are underpinning oil," said David Wech, head of research at consultancy JBC Energy in Vienna. "There is clearly a risk premium in the market."
Brent crude futures for February rose 57 cents to a high of $108.28 a barrel before easing back to trade around $108 by 1220 GMT. U.S. crude rose 37 cents to $99.04.
Dominick Chirichella, analyst at New York's Energy Management Institute, said financial markets were entering a period of low liquidity and could expect relatively large intraday moves over the end-year festive season.
"Iran and the broader Middle East, including Iraq now that the United States is gone, will continue to act on the oil market with exposure for price spikes at anytime. The geopolitics of the region are once again on the radar," he said.
A report on Wednesday of a very sharp drop in U.S. crude oil inventories also helped bolster prices and balance worries that the euro zone debt crisis would curtail global oil demand.
U.S. government data showed domestic crude stocks fell 10.6 million barrels last week to 323.6 million barrels, the lowest level since the week to Dec. 26, 2008, after logging their biggest weekly inventory draw down in nearly 11 years.
But the sharp drop in U.S. crude stocks could be partly due to a downward adjustment after an overstatement of inventories the previous week, BNP Paribas said in a research note.
"The scope for further crude draws may moderate due to the combined effect of crude production increases emerging and how refinery runs respond to weaker margins," BNP Paribas said.
Financial stocks led European shares higher on Thursday, while the euro rose, on hopes the nearly half a trillion euros in three-year funds that banks have borrowed from the region's central bank will ease current funding strains.
The European Central Bank, in its first-ever three-year tender, lent 523 banks a record 489 billion euros ($638 billion) on Wednesday, well above the 310 billion euro take up forecast.
But initial optimism over the bigger-than-expected take up eased as doubts set in over how much of the money would reach struggling euro zone economies and boost confidence.
Euro zone uncertainty has dampened the market's mood after a slew of positive U.S. economic news this week raised hopes of growth accelerating in the world's biggest oil consumer.
Demand is also expected to hold firm in China, the no.2 oil user, after apparent oil demand gained 2.6 percent from a year earlier in November, the second-highest daily rate on record, Reuters calculations from official data showed.
Wech said Chinese consumers were likely to replenish stocks if oil prices eased, helping underpin the market.
"If prices were to fall much, Chinese buyers would be expected to come into the market to rebuild stocks," Wech said.
China's commercial banks anticipate looser monetary policy in the first three months of 2012, surveys from the People's Bank of China revealed on Thursday, a development that will support oil demand next year.