Oil price rises on global economy hopes

The oil price has risen sharply on optimism about the global economy as well as fears over Middle East tension.

Brent crude closed at $112.27 a barrel, up $4.89 on the day, while US crude was up $4.13 to $102.96.

Better-than-expected survey data from the US, China, India and some eurozone states boosted hopes for a global recovery and increased oil demand.

But a recent Iranian missile test and new US and EU sanctions have also led to concerns about oil supply.

Iran has threatened to close the Strait of Hormuz, a route for 15% of global oil exports.

The weaker US dollar has also helped push up the price of the fuel by making oil a cheaper investment.

Economy boost

In the US, a recent run of positive economic data continued on Tuesday when the Institute for Supply Management said its index of national factory activity had risen to a better-than-expected 53.9 in December from 52.7 the month before.

Any figure above 50 indicates growth in the sector.

It echoed recent stronger-than-expected manufacturing data from China and India.

Figures from the UK also showed a smaller-than-expected decline in the manufacturing sector in December, thanks to new orders from Germany, China and eastern Europe.

The Markit/CPS purchasing managers' index for the UK rose to 49.6 from November's figure of 47.7.

"People are being cautiously optimistic about where they think things could go over the next nine months," said Nick McGregor, an oil analyst at stockbrokers Redmayne Bentley.

"If growth is higher than expected, than suddenly we could be back to a situation like 2008 where people are querying whether or not there is supply capacity," he added.

Iran fears

But analysts say the sharp rise in the price of oil is about more than just economic optimism.

Concerns over Iran's nuclear programme have led to new EU and US sanctions on some Iranian oil exports.

Image caption Iranian missile tests in the strategically important Strait of Hormuz have raised fears

Iran is the world's fourth largest oil producer and claims to have control over the strategically significant Strait of Hormuz through which about 15% of the world's oil exports pass.

On Monday, it carried out a missile test in the region and it has warned the US not place ships in the Gulf.

"If you look at other commodity prices; industrial metals for instance, the intra-day movement up in oil has been stronger [than them] and part of that strength has definitely come from Iran," says Amrita Sen, oil analyst at Barclays Capital.

"The general rhetoric around Iran is what has supported the oil price over the last month or so."

However increases in the cost of oil may in turn damage the global economy - limiting price rises.

"Whenever prices are going too high you can clearly see US demand starts falling - there is a limit to how much price can go up," given the weak economy, Ms Sen says.