Brent crude below $126, holds most gains made on Iran worries

Brent crude was steady below $126 a barrel on Monday, holding onto most of the previous session's gains made on continued concerns over potential supply disruptions from Iran, with the risk of major supply squeeze still being factored in.

Higher output from top exporter Saudi Arabia and plans by Iraq to expand its export routes have, however, tempered fears of a loss of Iranian barrels as the deadline for tougher Western sanctions approaches, analysts said.

"It's a question of whether other producers can handle a significant supply disruption," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

"The market is still building a risk premium into prices due to the potential difficulty with Iran."

The new sanctions, due to take effect from July 1, have helped boost Brent prices by nearly 17% so far this year and on Monday, Brent crude was trading at $125.64 a barrel, down just 17 cents after settling up more than $3 in the previous session.

US crude rose 6 cents to $107.12, after climbing almost $2 on Friday.

Oil prices were also supported by a brighter outlook for the US economy and signs of growing stability in the euro zone which also helped push Asian stocks higher on Monday.

The global economy has stepped back from the brink of danger, but high debt levels in developed markets and rising oil prices are key risks, International Monetary Fund Managing Director Christine Lagarde said in Beijing on Sunday.

However, barring a supply shock, the upside for oil prices is limited, analysts at US investment bank Morgan Stanley said in a report.

"Risks are skewed to the downside, particularly if outages resolve, SPRs (strategic petroleum reserves) are released, or geopolitical tensions recede," the report said.

Reuters reported last week that Britain had agreed to cooperate with the United States to release reserves in a bid to halt rising oil prices, but that volumes and exact timelines had not yet been determined.

Saudi, Iraq output

Saudi Arabian oil exports rose 143,000 barrels per day (bpd) in January on the month, according to government data published Sunday, as the world's leading crude seller increased supplies to the United States.

Iraq has also set up a contingency plan to expand its oil export routes to deal with any potential crisis should Iran close the Strait of Hormuz that is used for a third of the world's seaborne oil trade, a government spokesman said.

Another Opec producer, Oman, located strategically on the opposite side of the Strait of Hormuz, said the risk of military conflict between Tehran and the West was rising but there was still plenty of opportunity to negotiate peace.

Iran has repeatedly denied charges by Western nations it is developing the capability to build nuclear weapons, but the United States and European Union have recently imposed tougher sanctions in a bid to get Tehran to curb its nuclear programme.

US recovery, China data

US economic data last week added to a recent spate of good news about the pace of recovery and put a floor under oil prices.

Market participants will now be looking at preliminary Chinese manufacturing data for March due later this week for an indication of energy demand in the world's No.2 oil consumer.

"January and February data was distorted because of Chinese New Year, so the March numbers could give us the first look at the trend for the Chinese economy this year," Spooner said.

HSBC's March flash PMI, the earliest indicator of China's industrial activity, will be released on Thursday.

China recently cut its official 2012 growth target to 7.5% from the 8% targeted in each of the last eight years, aiming to create leeway to deliver reform without igniting inflation.