SINGAPORE Brent crude was steady near $126 (79.54 pounds) a barrel on Monday, extending previous session's gains, as prices were supported by continued concerns over a potential supply disruption from Iran and the prospect of a stronger U.S. economy lifting oil demand.
Higher output from top producer Saudi Arabia and plans by Iraq to expand its export routes have tempered fears of a loss of Iranian barrels as the deadline for tougher Western sanctions approaches, but the risk of a major supply squeeze remains, analysts said.
"It's a question of whether other producers can handle a significant supply disruption," said Ric Spooner, the chief market analyst with CMC Markets in Sydney. "The market is still building a risk premium into prices due to the potential difficulty with Iran."
Brent crude edged up 10 cents to $125.91 a barrel by 5:01 am British time, after settling up more than $3 in the previous session. U.S. crude rose 32 cents to $107.38, after climbing almost $2 on Friday.
On the demand side, a brighter outlook for the U.S. economy and signs of growing stability in the euro zone pushed U.S. stocks to a near four-year high last week.
The global economy has stepped back from the brink of danger, but high debt levels in developed markets and rising oil prices are key risks, International Monetary Fund (IMF) Managing Director Christine Lagarde said in Beijing on Sunday.
PDF of Iran reports: link.reuters.com/duf27s
However, barring a supply shock, the upside for oil prices is limited, analysts at U.S. investment bank Morgan Stanley said in a report.
"Risks are skewed to the downside, particularly if outages resolve, SPRs (strategic petroleum reserves) are released, or geopolitical tensions recede," the report said.
Reuters reported on Thursday that Britain had agreed to cooperate with the United States to release reserves in a bid to halt rising oil prices, but that volumes and exact timelines had not yet been determined.
SAUDI, IRAQ OUTPUT
Saudi Arabian oil exports rose 143,000 barrels per day (bpd) in January on the month, according to government data published Sunday, as the world's leading crude seller increased supplies to the United States.
To deal with any potential crisis should Iran close the Strait of Hormuz that is used for a third of the world's seaborne oil trade, Iraq has set up a contingency plan to expand its oil export routes, a government spokesman said.
Another OPEC producer, Oman, located strategically on the opposite side of the Strait of Hormuz, said the risk of military conflict between Tehran and the West was rising but there was still plenty of opportunity to negotiate peace.
Iran has repeatedly denied charges by Western nations it is developing the capability to build nuclear weapons, but the United States and European Union have recently imposed tougher sanctions in a bid to get Tehran to curb its nuclear programme.
U.S. RECOVERY, CHINA DATA
The new sanctions, due to take effect from July 1, have helped boost Brent prices by nearly 17 percent so far this year, stoking fears that higher fuel prices could derail economic growth in the United States, the world's top oil consumer.
But U.S. economic data last week added to a recent spate of good news about the pace of recovery and put a floor under oil prices.
Market participants will now be looking at preliminary Chinese manufacturing data for March due later this week for an indication of energy demand in the world's No.2 oil consumer.
"January and February data was distorted because of Chinese New Year, so the March numbers could give us the first look at the trend for the Chinese economy this year," Spooner said.
HSBC's March flash PMI, the earliest indicator of China's industrial activity, will be released on Thursday.
Chinese home prices fell in February from January for a fifth consecutive month and are expected to continue heading south in coming months, underlining the success of Beijing's long campaign to cool property market speculation.
China recently cut its official 2012 growth target to 7.5 percent from the 8 percent targeted in each of the last eight years, aiming to create leeway to deliver reform of areas including subsidies without igniting inflation.
(Editing by Himani Sarkar)