NEW YORK Oil prices vaulted 4 percent on Friday -- their biggest gain in nearly two months -- amid supply snags in Nigeria and the North Sea and a looming cold spell in the huge U.S. Northeast heating oil market.
Dealers added that an escalating legal battle between Exxon Mobil and Venezuela over the country's nationalization of a multibillion-dollar oil project was also encouraging the rally, raising the possibility of a supply halt.
U.S. crude jumped $3.53 to $91.64 a barrel by 2:00 p.m. EST, reversing most of the week's losses that had been triggered by concern an economic slowdown would dent demand for fuel. London Brent gained $3.34 to $91.85.
"A lot of people with short positions are running away from them, respecting the potential of this market to run back up," said Tim Evans, analyst at Citigroup Futures Research.
The gains were triggered after Royal Dutch Shell (RDSa.L) said 130,000 barrels of its daily crude oil production from Nigeria was halted because of pipeline leaks, adding to supply disruptions from the OPEC country caused by militant attacks.
Dealers said they were also concerned about supplies from Britain's North Sea oil fields after a string of recent weather-related platform shutdowns and added they were watching an expected drop in temperatures in the U.S. Northeast over the weekend that could boost heating oil consumption.
Meanwhile, oil major Exxon Mobil launched a legal attack on major U.S. crude supplier Venezuela, leading to the freeze of $12 billion of the country's overseas oil assets as it pushes for compensation for a nationalized oil project.
Venezuela Oil Minister Rafael Ramirez said on Friday the move would not impact the country's operations, but traders said they remained concerned that Venezuela President Hugo Chavez could react by ceasing crude sales to Exxon or to the United States.
"The Venezuelan situation regarding the Exxon Mobil court orders is helping the crude rally as traders are concerned it could prompt some retaliation from Chavez," said Jim Ritterbusch, analyst at Ritterbusch and Associates.
The rally comes against the backdrop of continued OPEC production restrictions and recent comments from some members in the group that it may agree to cut production at the next scheduled meeting in March due to a weakening demand outlook.
Gains in the oil market have been tempered in recent months by worries about the health of the U.S. economy in the fallout of a housing crisis and credit crunch.
Fear of a U.S. recession that could dampen oil demand in the world's top consumer has pulled prices back from the record high of $100.09 a barrel hit at the start of this year.
Analysts at MF Global said: "Ultimately, the question that market participants will have to answer is whether on not there is going to be a recession and how deep and how long is it going to be?"
A stream of data released in recent days has pointed to a recession steadily taking hold in the United States.
On Friday, the director of the Reuters/University of Michigan consumer sentiment survey said the U.S. economy had entered a recession that will be more painful and drawn out than the usual downturn.