Brent crude climbed above USD 110 on Monday, extending gains from last week, as rising tensions between Iran and the West increased the risk of disruptions to crude shipments by the world's fifth-largest oil exporter.
Iran is also unlikely to support production hikes when the Organization of the Petroleum Exporting Countries meets in Vienna next week, increasing the risk the grouping will fail to raise output at a time when high energy prices threaten to push the global economy into recession.
Brent crude rose 44 cents to USD 110.38 a barrel by 0554 GMT, after posting a weekly gain of more than 3%, in its best weekly percentage gain since mid-October.
US crude climbed 37 cents to USD 101.33 a barrel. The benchmark posted a 4.3% gain last week.
"Oil traders are pricing in a 20% chance of a military conflict with Iran, which could push prices above USD 200, so they're buying insurance now," said Gordon Kwan, head of energy research at Mirae Asset Management in Hong Kong.
"The market is also watching for the OPEC meeting on December 14, and recent hawkish statements about no need for production increases despite high prices."
OPEC member Qatar's energy minister and the grouping's Secretary-General Abdullah al-Badri said in separate comments on Sunday the global oil market was sufficiently supplied.
The dispute over Tehran's nuclear programme heated up over the weekend after Iranian media reported their country's military had shot down a US reconnaissance drone, although a US official said there was no indication the aircraft had been hit.
Israeli Prime Minister Benjamin Netanyahu has called a nuclear-armed Iran an existential threat to Israel, and along with the United States has said that all options are on the table to deal with such a threat. Iran says it is enriching uranium for peaceful purposes.
Netanyahu responded indirectly to US warnings over a military strike on Iran, saying that Israel had in the past made the right decision to go it alone even when allies objected.
An Iranian official said on Sunday any move to block its oil exports would more than double crude prices with devastating consequences on a fragile global economy.
Euro zone hopesEvents in the Middle East overshadowed the ongoing debt crisis in Europe, which has weighed on oil prices for months and enters a critical phase this week as European leaders are set to unveil a definitive rescue plan at a crucial summit.
"Over the past week, markets have been positioning themselves to reduce the risk of being caught on the wrong side of initiatives that will improve the situation in Europe," said Ric Spooner, chief market analyst at CMC Markets in Sydney.
"Markets will also be encouraged by news that new Italian Prime Minister Monti has won cabinet approval for a package of austerity measures."
Asian shares and the euro firmed on Monday, while gold prices held steady, ahead of an eventful week in Europe, which also sees the European Central Bank's last monetary policy meeting for the year on Thursday, with an expectation for a rate cut.
Later on Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel meet to outline joint proposals for more coercive budget discipline in the euro zone, which they want all 27 EU leaders to approve at Friday's summit.
China slowsThe Chinese economy showed further signs of slowing on Monday, raising hopes the central bank would take more action to support growth in the world's no. 2 oil consumer.
The HSBC Purchasing Managers' Index for China's services sector fell to 52.5 from 54.1 in November, marking its slowest rate of growth in three months.
PMI data in the past week has shown both domestic and export orders are weakening, helping explain the central bank's decision last week to cut reserve requirements for commercial lenders for the first time in three years.
"The data indicates that tightening by the Chinese government is already over, and the reserve requirement cut marks the beginning of selective policy moves to engineer a soft landing, which will further support oil prices," said Mirae's Kwan.
