Oil hits 3-month high above $114 on supply concern

LONDON (Reuters): Oil rose above $114 per barrel on Monday to the highest in more than three months as concern about supplies and hopes that governments will roll out more stimulus measures trumped signs of weakening fuel demand.

Supply of the North Sea crudes underpinning the Brent crude contract is set to hit a record low. Iranian output has been curbed by sanctions while an intensification of debate in Israel on whether to go to war with Iran over its nuclear work added to concern about disruption in Middle East supply.

Brent crude hit $114.46 a barrel, the highest since May 4, and by 0937 GMT was up $1.30 at $114.25. U.S. oil rose 60 cents to $93.47.

“The likelihood of some sort of intervention to stimulate economies is supporting the market,” said Christopher Bellew, an oil broker at Jefferies Bache in London. “Also, the North Sea, Iran and the Middle East are still a factor.” The supply concerns countered forecasts of weakening oil demand which have weighed on prices. The International Energy Agency on Friday cut its 2013 oil demand forecast by 400,000 barrels per day, citing a slowdown in global economic activity.

“We are seeing prices rise despite weak growth outlook numbers on Friday,” said Ben Le Brun, a Sydney-based market analyst at OptionsXpress. “The Israeli comments, what you see in Israeli media, is a concern. A major concern.”

Prime Minister Benjamin Netanyahu said on Sunday that most threats to Israel’s security were “dwarfed” by the prospect of Iran obtaining nuclear weapons, which local media reports said Tehran had stepped up its efforts to achieve.

Brent is being supported in particular by a drop in output , sending the price of immediate supplies to a widening premium to oil for delivery later, a structure known as backwardation.

Output of the four North Sea crudes that underpin Brent will sink to a record low in September due to oilfield maintenance and natural decline. Output from 11 North Sea production streams is set to fall by 17 percent.

On Monday, the premium at which the nearby Brent contract, currently September, trades against the second month jumped to $2.02, the highest since October 2011.

“The backwardation in Brent is very big. I think that’s because of the North Sea,” Bellew said.

Supply concerns and the prospect of further government stimulus including a further round of quantitative easing by the U.S. Federal Reserve is likely to support a continued premium for prompt supplies, say analysts.

“Exacerbated by the recent structural supply shortage in the North Sea, Iran and other countries, we could see a period of super-backwardation, analysts at Bank of America Merrill Lynch said in a report.

“We also believe that further unconventional monetary easing will likely keep prices supported.”