Oil prices spiked this evening as the market was caught up in rumours about Iranian military exercises - later denied - in the key Persian Gulf route.
Brent North Sea crude surged as high as $111.10 a barrel, before pulling back to $109.32, which was still a hefty gain of $2.06 from Monday's closing level. US crude stood at $99.70, up $1.93 from Monday.
Oil traders remain fearful that Iran could try and block the strategically-sensitive Strait of Hormuz that links the Gulf with the Gulf of Oman and through which much of the region's oil is transported.
A US drone captured by Iran is now the property of the Islamic republic, Iran's Defence Minister Ahmad Vahidi said today, dismissing a request by US President Barack Obama for its return to stoke tensions between the two.
The incident came after Britain, Canada and the US last month slapped increased sanctions on Iran's financial, petrochemical and energy sectors after a UN report that strongly suggested Tehran was researching nuclear weapons. Tehran has dismissed the UN report as baseless.
OPEC, meanwhile, appears set to reach consensus over maintaining its official output quota at a meeting in Vienna tomorrow, as data showed that the cartel's crude production was at the highest level for more than three years last month.
Ahead of Wednesday's meeting, the cartel's president Iran said the OPEC would reach consensus over output. Kuwait's Oil Minister Mohammad al-Baseeri said OPEC was likely to keep its production quota unchanged as the market was balanced and crude prices stable.
Analysts widely expect the Vienna-based organisation, which supplies a third of the world's crude, to maintain its official output target of 24.84 million barrels per day - where it has stood for almost three years.
But with the International Energy Agency (IEA) estimating that actual OPEC production hit 30.68 million barrels of oil per day (mbpd) in November - the highest amount in more than three years - the cartel may decide to issue a statement promising stricter compliance with its quotas.
OPEC, IEA lower demand forecasts
OPEC said in its monthly report today that world oil demand next year would reach 88.87 million barrels per day (bpd), revising downwards its previous forecast of 89.01 million bpd.
"The adjustment reflects slowing growth in the OECD, which is expected to have spillover effects for China and India, and hence impact oil consumption over the coming year," the cartel said.
For 2011, demand remained virtually unchanged at 87.8 million bpd, compared with 87.81 million bpd in OPEC's last monthly report in November.
Meanwhile, the International Energy Agency has again cut its forecast for growth of global demand for this year and next.
The euro zone debt crisis is cooling the global oil market rapidly but likely sanctions against Iran are holding prices up for now, according to the IEA.
It lowered its forecast for demand growth sharply by about 200,000 barrels per day to 700,000 barrels per day.