Brent oil prices surged to near 2-1/2 year highs on Wednesday as fresh tensions between Israel and Iran added to markets already on edge over spreading unrest in the Middle East.
Israel's foreign minister said two Iranian warships planned to sail through the Suez Canal en route to Syria and called the move a "provocation," sending up prices in morning U.S. trade.
Prices remained elevated even though the Iranian naval contingent described by Foreign Minister Avigdor Lieberman posed no significant military threat to Israel. However, it could spell the closest-ever encounter by the forces of the two old foes, who are geographically distant.
Brent crude rose $1.97 to $103.61 at 2 p.m. EST (1900 GMT), after hitting $104.52 earlier, the highest level since September 2008. U.S. crude settled up 67 cents at $84.99, rising after three days of losses.
Oil markets were already jittery after reports of clashes in Iran, Yemen and Bahrain and a rare show of unrest in Libya added to fears that the kind of unrest that toppled the presidents of Egypt and Tunisia could spread to oil-producing countries in the Middle East and disrupt oil flow in the region.
"Troubles in the Middle East are back on the agenda, protests in Bahrain and Saudi have drummed up political tension," said Rob Montefusco, an oil trader at Sucden Financial.
The popular uprising in Egypt had helped push Brent crude over $100 a barrel in late January, sending its premium to U.S. oil futures to record levels over $16 a barrel.
Brent's stronger gains pushed its premium to U.S. crude to $16.03 a barrel on Wednesday, less than 30 cents from the record hit Friday.
Adding to the widening of the premium was the latest rise in inventory levels at the Cushing, Oklahoma, delivery point for the New York Mercantile Exchange oil futures contract.
Crude stored at the hub rose 250,000 barrels last week to 37.7 million barrels, just below the 38.3 million barrel record level hit in the week to January 28, the U.S. Energy Information Administration's weekly data showed.
In total, U.S. crude stocks rose 860,000 barrels, to 345.9 million barrels, up for the fifth straight week, and initially weighing on U.S. crude futures, even though the increase was much less than the forecast.
U.S. gasoline stockpiles gained for the seventh week in a row, adding 200,000 barrels, much less than expected, to 241.1 million barrels.
Even so, the gasoline crack spread rose to near the week's high above $21 a barrel, the highest in 3-1/2 years.
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