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, Avigdor Lieberman, 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.
Later, the ships were identified by an Israeli newspaper as a frigate and a supply vessel, which would not present a significant danger to the Jewish state. Israel's state-funded television said Lieberman, a far-right partner in the conservative coalition, had spoken out of turn as the Defence Ministry "had preferred to ignore" the ships' approach.
Brent crude posted its highest close since September 2008, settling up $2.14 at $103.78 (U.S.) a barrel after rising as high as $104.52. 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 a record $16.31 a barrel on Wednesday.
U.S. CRUDE, GASOLINE STOCKS UP
Also helping widen 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 Jan. 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 $22.01 a barrel, the highest in 3-1/2 years.
In other commodity markets, gold ended flat Wednesday following a brief rally to one-month highs on the Middle East tensions. Gold usually rises on geopolitical worries because of perceptions it is a safe-haven investment.
"The gold market is starting to pay more attention to the external geopolitical events rather than the positive economic data, which would have kept the market sharply lower," said Frank McGhee, head precious metals trader at Integrated Brokerage Service.
Analysts said technical buying continued to support bullion after it breached key resistance at its 50-day and 100-day moving averages on Tuesday.
Spot gold hit a one-month high of $1,381.84 an ounce after Israel's announcement, before trimming gains. It was up 0.1 per cent at $1,374.20 by 2:21 p.m. ET.
The U.S. gold contract for April delivery settled up $1 at $1,375.10 an ounce, with volume about 40 per cent below its 30-day moving average. That was in line with recent lower-than-normal turnover, a possible sign of dwindling interest.
In other commodities, wheat and copper extended losses from Tuesday as investors continued to worry whether prices had gotten ahead of demand. Cotton hit record highs of nearly $2 a lb and sugar surged 4 per cent.
Copper ended down for a second straight day Wednesday, sinking further away from this week's record high, as concerns about rising inflation and restrained growth prospects in emerging world economies began to bite.
With price pressures on the rise in China and in other emerging economies, analysts began to question the sustainability of the global recovery, worrying that higher food costs could create a significant slowdown in growth this year.