Brent gains, stays above $107 on supply woes; Europe eyed

Tension between major oil producer Iran and the West remains high after inconclusive discussions last week on Iran's nuclear programme, reviving the risk of war breaking out in the Middle East and disrupting global oil supplies.

"Iran is back on the radar. We are not going to see any move to lift sanctions any time soon, geo-political risk will continue to be the underlying support for prices," said Michael Creed, an economist at National Australia Bank.

Brent crude for July delivery rose 51 cents to $107.62 per barrel by 0646 GMT, after hitting a high of $108.04 in the previous session.

US crude oil futures gained 55 cents to $91.41.

Iranian officials have declined to grant access to a complex at the centre of Western suspicion that Iran is developing nuclear weapons capability. Tehran has denied having any such ambition.

The International Atomic Energy Agency said last week satellite images showed "extensive activities" at Parchin.

Six world powers failed to persuade Iran last week to halt its most sensitive nuclear work, but they will meet again in Moscow next month to try to end a stand-off that has raised fears of a war that could threaten global oil supplies.

ON EDGE

The stalled talks surrounding Iran's nuclear program has lent some stability to oil prices that have fallen around 10 percent this month amid a simmering debt crisis in Europe and uncertainty facing the U.S. and Chinese economies.

"The market is no longer overvalued and could regain some ground in the days ahead," Credit Suisse said in a note.

But fresh worries about Spain are expected to keep investor sentiment fragile and gains short-lived.

Spain's plan to use public debt to revive one of its troubled banks has raised worries that it could recapitalise other weak lenders at a time when borrowing costs are already surging.

"Markets are concerned because of the government's decision to bail out Bankia SA . This raises questions over Spain's ability to service it own debt," said Creed of National Australia Bank.

"The focus has never been just about Greece, but on countries like Spain and the risks of a contagion, and now with bond yields at dangerously high levels we are going to see markets on edge again."

Outside of Europe, Chinese data this week is likely to affirm economic weakness in the world's No. 2 oil user even as the government steps up stimulus measures.

A Reuters poll showed China's official manufacturing managers' index may have eased in May from a 13-month high in April.