Brent crude rose for a fourth day, hitting a fresh nine-month high and a record in euro terms on Thursday, creating a new headache for cash-strapped Europe on heightened tensions between Iran and the West.
On a euro basis, Brent futures hit a record 93.60 euros per barrel in early trade, exceeding the previous peak of 93.46 hit on July 3, 2008, prompting concern that high oil prices would hit the shaky economic recovery and further dent demand.
U.S. crude rose further, as investors sold off a key spread -- the premium of international benchmark Brent to U.S. futures -- after a government report showed a drop in inventories at the Cushing, Oklahoma, delivery point for the New York Mercantile Exchange's contract.
Rising inventories in the U.S. Midwest have depressed the value for U.S. futures, widening Brent's premium to U.S. crude to over $20 a barrel earlier in the month. The spread narrowed about 90 cents on Thursday, trading at $15.70 a barrel near the close of floor trading in New York.
Brent's total trading volume was up 11 percent from its 30-day average, Reuters data showed. U.S. crude volume was down more than 7 percent from its 30-day average.
Goldman Sachs said in a research note it expected the spread to narrow to $5 a barrel over the next six months, as the reversal of the Seaway pipeline in the Midwest sends more crude from the region to the Gulf Coast refining hub.
The bank also recommended taking profits on July 2012 Brent long positions and opening September 2012 long positions for U.S. crude oil futures.
"Spread trading on WTI-Brent pushed up U.S. crude, which is also testing technical resistance here," said Chris Dillman, analyst at Tradition Energy in Stamford, Connecticut.
By 2:40 p.m. EST (1940 GMT), Brent crude for April delivery rose 77 cents to $123.67 a barrel, off the session high of $124.50, the highest for front-month Brent since May 3 last year.
Rising for the sixth consecutive session, U.S. April crude settled at $107.83, gaining $1.55, after having climbed to a session high of $108.05, the highest settlement for front-month NYMEX crude since May 4 last year.
U.S. crude oil inventories rose 1.63 million barrels last week, more than expected, but stockpiles at the Cushing, Oklahoma, hub dropped 315,000 even though overall U.S. crude inventories rose 1.63 million barrels last week, more than expected, according to data from the U.S. Energy Information Administration.
"The draw in Cushing caused a selling of the Brent-WTI spread, which had strengthened previously after stocks there rose in recent weeks," said Hamza Khan, analyst at the Schork Group in Villanova, Pennsylvania.
Iran remained defiant after U.N. nuclear inspectors said they had failed in their latest mission to check activities at a site where the U.N. International Energy Agency said there is a facility to test explosives.
Iran's stance has sparked fears that Iran's confrontation with the West over its disputed nuclear program would escalate and affect oil flow from the Middle East.
Sanctions imposed by the United States against Tehran have already caused Asian buyers to cut purchases of Iranian oil while the European Union has moved to ban Iranian oil from July.
The bombardment of rebel sites by government forces in Syria and attacks on mostly Shi-ite targets across Iraq added to investor anxiety over the Middle East.
U.S. INVENTORIES, DEMAND ECONOMIC DATA
While U.S. inventories of distillates and gasoline showed modest declines last week, demand for refined oil products plunged to their lowest level in nearly 15 years, EIA data showed in the latest EIA report.
Total U.S. oil product demand on a four-week average basis fell last week by 6.7 percent year-on-year to 18.05 million barrels per day, the lowest level since April 1997.
Ahead of the U.S. summer driving season, motorists were cutting back on fuel usage due to high pump prices. (Additional reporting by Robert Gibbons and Matthew Robinson in New York, Zaida Espana and Simon Falush in London; Editing by Lisa Shumaker)