Oil prices surged on Tuesday as Iran threatened to choke off crude shipments through the strategic Strait of Hormuz in retaliation against tougher sanctions from the West over its nuclear program.
Brent February crude rose 4 cents to $112.17 barrel by 1040 GMT, after rising more than 4 percent on Tuesday to settle at the highest since November 15. This represented the biggest one day gain since last May.
U.S. February crude was down 20 cents to $102.26 a barrel, following its highest close since May 10.
However, sluggish demand, particularly in Europe, could be put under further pressure by prices at these levels, said Olivier Jakob, analyst at Petromatrix in Zug, Switzerland.
"Iran is the supporting factor, but these price levels will hurt the economy, Europe oil demand with prices at these levels will be a total disaster."
He added that the euro's recent weakness against the dollar was making oil particularly expensive in the region, equivalent to $133 per barrel in 2008 terms.
Tensions between Iran and the West heightened further after Tehran issued its most aggressive statement yet as new U.S. and EU financial sanctions take a toll on its economy.
Tehran threatened to take action if the U.S. Navy moved an aircraft carrier into the Gulf but the U.S. dismissed it, saying it would keep sending carrier strike groups through the Gulf.
However many think the chance of Iran following through with its threats is fairly remote, and that prices will begin to reflect this.
"I don't think anyone thinks that Iran has anything to gain by doing it, and they will hurt themselves and their relationship with China," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.
Political risk from Kazakhstan was also a factor, with President Nursultan Nazarbayev on Wednesday extending until January 31 a state of emergency in the western oil city of Zhanaozen, where at least 16 people were killed last month-Reuters
