Brent crude climbed above $98 per barrel on Tuesday as escalating tensions between Iran and the west offset concerns that gloomy manufacturing data from China, the United States and Europe will hurt oil demand.
Iran plans to stop oil tankers from shipping crude through the Strait of Hormuz to countries supporting sanctions against it, a move that will threaten supply at a time when a strike in Norway has curbed output.
More than a third of the world's seaborne oil exports pass through the narrow Strait of Hormuz from the oilfields of Saudi Arabia, Iran, Kuwait, Iraq, the United Arab Emirates and Qatar.
Brent crude gained 79 cents to $98.13 per barrel by 0502 GMT while U.S. crude rose by 50 cents to $84.25.
"Iran is always a factor and it has the potential to have a dramatic impact on oil prices," said Ben Le Brun, a markets analyst at OptionsXpress in Sydney.
"Oil prices and other risk assets are on hold after weak U.S. and China data which are two major (consumers)."
U.S. manufacturing shrank for the first time in nearly three years, adding to concerns of weakness in the euro zone where the unemployment rose to a record in May, while factory activity in China slipped to a seven-month low.
Initial euphoria over a European agreement to use rescue funds to lower government borrowing costs faded after indications from Finland that the deal could be fraying.
Demand worries were mitigated by the latest data from China, the world's no. 2 oil consumer, which showed its services sector expanding at its fastest pace in three months, leaving intact market expectations for more policy measures to support growth.
"Despite the notable slowdown in global economic growth, we continue to expect that oil demand will grow well in excess of production capacity growth," Goldman Sachs analysts said in a note on Tuesday.
"It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply."
Iran's National Security and Foreign Policy Committee has drafted a bill to try and stop crude oil tankers from passing through the Strait of Hormuz to countries that support sanctions against it.
But such a bill would still require support from the leadership to come into effect.
Iranian threats to block the waterway through which about 17 million barrels a day sailed in 2011 have grown in the past year as U.S. and European sanctions aimed at starving Tehran of funds for its nuclear programme have tightened.
Tehran says its nuclear plans are aimed for peaceful purposes such as generating electricity and medical isotopes and not for weapons development.
Also curbing oil supply, a strike by Norway's offshore oil and gas workers has begun to slow crude oil exports as the conflict over pension and retirement rights remained deadlocked.
A delay in loadings of Oseberg crude is the first sign the week-long strike has affected shipments from the world's eighth-largest exporter. Production of oil and natural gas liquids has been cut by about 13 percent of capacity, and some natural gas output has also been affected.
Also supporting prices, crude oil stocks in the U.S. may have fallen last week according to a Reuters survey of analysts on Monday.