Picture: REUTERS
Picture: REUTERS

LONDON — Oil reached its highest level since September on Thursday after the head of the European Central Bank (ECB) said inflationary pressures were likely to diminish, and due to renewed tensions in the Middle East.

ECB president Mario Draghi said he expected inflation to fall below 2% in coming months and that economic activity should gradually recover later in the year.

"The ECB is seen as being accommodative, and there may be a perception that they are not going to normalise monetary policy anytime soon, which could be improving sentiment," said Michael Hewson, an analyst at CMC Markets.

March Brent futures were up $0.77 at $117.50 a barrel at 2.42pm GMT.

US crude underperformed, gaining $0.22 to $96.84 after data showed a drop in the number of US jobless claims that came below analysts’ expectations.

The spread between the two benchmarks widened beyond $20 a barrel, also pushed higher by a glut at the Cushing storage hub, in part because of delays in improvements to pipelines taking oil to refineries.

Economic activity in the euro area should gradually recover later in the year, but there are more negative risks than positive ones, Mr Draghi said.

The eurozone economy contracted in the second and third quarters of last year, meeting the technical definition of a recession, and the downturn is expected to have deepened in the fourth quarter.

Investors were nervous of any signals that the ECB might look at increasing interest rates, which are at a record low of 0.75%.

"Brent has been in an upward channel in the past two weeks. That all comes back to increased investor risk appetite," said BNP Paribas analyst Gareth Lewis-Davies.

Supporting the view that oil supply will remain contained, an industry source said on Wednesday that Saudi Arabia’s production last month remained largely unchanged from December, when output was cut by about 700,000 barrels a day.

Brent’s strong backwardation, when front-month prices are higher than those in the future, further supported the benchmark because they offered attractive rollover yields to investors, said Bjarne Schieldrop, an analyst at SEB in Oslo.

"The backwardation is an expression of a tight physical market, which explains why Brent has been gaining ground."

Economic fillip

Oil markets have been drawing comfort in recent weeks from signs that the eurozone economy may have neared its lowest point, while the economies of top oil consumers the US and China have signalled a pickup in activity.

The Chinese economy ended seven straight quarters of slowing growth with a 7.9% lift in the fourth quarter. The US services sector extended a three-year expansion last month, and the employment index hit a seven-year high.

Iran’s supreme leader, Ayatollah Ali Khamenei, on Thursday rejected an offer by US Vice President Joe Biden to hold direct talks, denting hopes for the resolution of disputes over Tehran’s nuclear programme.

Increasing unrest in Syria and Tunisia are further supporting oil prices as investors fear supply disruptions in the Middle East, the world’s largest oil-producing area.

"Any uncertainty over the Iranian crisis tends to heighten prices. With the rejection of bilateral talks, the likelihood of the embargo on Iran continuing or increasing is there," said Gareth Lewis-Davies, an analyst at BNP Paribas.