Brent crude rose on Monday to above $121 a barrel, the highest in eight months, as Iran halted exports to British and French companies ahead of a European Union embargo, while policy easing by China and hopes for a Greek bailout also buoyed prices.
Fears of supply disruption in Iran and upbeat economic data from the world's largest oil user, the United States, have pushed Brent prices up over the past month.
Brent crude hit a session high of $121.15 per barrel, a level not seen since mid-June last year. It stood at $120.38 by 0815 GMT, up 80 cents from the previous close.
US crude rose $1.36 to $104.60 a barrel, after earlier rising to $105.21 a barrel, the highest since May last year.
OPEC's second largest producer, Iran, ordered a halt to its oil sales to British and French companies on Sunday, retaliating against tightening EU sanctions as its ties with the West remained strained over its disputed nuclear programme.
The announcement came as European oil buyers had already made big cuts in purchases from Iran months ahead of the sanctions.
"This is supply related so it had a psychological impact on the oil market," Ken Hasegawa, a Tokyo-based commodity sales manager at Newedge Japan, said.
Brent's price surge may also have triggered short-covering, extending gains for the contract, he added.
J.P. Morgan Chase (JPM.N) raised its 2012 price forecast for Brent crude by $6 to $118 a barrel on supply risks and rising economic growth. It also hiked its forecast for 2013 to $125 a barrel, up from $121.
Geopolitical issues in Iran, Syria, Sudan/South Sudan, Nigeria and elsewhere are creating increased demand for crude inventory, analysts led by Lawrence Eagles said in a February 19 note.
China Easing, Greece Bailout
Investors' appetite for riskier assets rose after China's central bank on Saturday cut the required reserve ratio (RRR) of banks, boosting lending capacity by more than $50 billion and supporting demand outlook for commodities from the world's second-largest economy.
"The RRR cut will most likely result in an acceleration of economic activity and that China's first-quarter growth is likely to surprise us on the upside," ANZ analysts wrote in a note.
Newedge's Hasegawa said the news was bullish for commodities which could draw more investments on higher risk appetite.
A softer dollar against the euro on expectations Greece would secure a debt bailout this week also supported oil prices.
Euro zone finance ministers are expected to approve a second rescue package for Greece at a meeting on Monday, a move that will hopefully put the country on a more stable financial footing and keep it inside the single currency region.
The dollar index was down 0.21 per cent. Dollar-denominated oil becomes more affordable to holders of other currencies when the greenback weakens.
Brent could extend gains to $125 a barrel this week on more bullish news although the chart is already in overbought territory, Newedge's Hasegawa said.
Brent crude's Relative Strength Index (RSI) was at 73.93 on Monday, according to Reuters data. A reading above 70 means the market is in the overbought territory.
March US gasoline futures rose to slightly above $3 a gallon on Monday after a fire idled BP Plc's (BP.L) (BP.N) 225,000 barrel per day (bpd) Cherry Point, Washington, refinery.
Market analysts expect the outage to lift gasoline prices on the US West Coast in the coming weeks.
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