Oil up on supportive economic data, supply worry

Excess oil is burnt off at the Mobil oil refinery at Altona in Melbourne June 27, 2008.

NEW YORK (Reuters) - Oil prices rose on Tuesday, posting the biggest percentage rise since October, on supportive economic data that also lifted the euro and equities, coupled with worries about potential supply disruptions in Iran and Kazakhstan.

U.S. stocks on Wall Street rallied 3 percent on signs of easing stress in Europe's bond markets as well as positive economic data at home and abroad. .N

U.S. housing starts and building permits jumped to a 1-1/2-year high in November, boosting hopes that the housing market is entering a tentative recovery.

"The biggest driver behind today's oil rally, in our view, was the revived 'risk on' trade that featured a dramatic 300 point advance in the Dow Jones Industrials index and a pop in the euro," Jim Ritterbusch, president at Ritterbusch & Associates, said in a note that also cited the potential threats to supply.

A sharp fall in Spanish borrowing costs boosted the euro along with a report showing German business sentiment rose sharply in December. The dollar index .DXY weakened about 0.5 percent.

Brent February crude rose $3.09, or 2.98 percent, to settle at $106.73 a barrel, having reached $107.27. It was the biggest one-day percentage rise since October 14.

Expiring U.S. January crude rose $3.34, or 3.34 percent, to settle at $97.22 a barrel, having reached $97.45 and pushing back above the 200-day moving average of $95.78. It was the biggest one-day percentage gain since October 27.

U.S. February crude rose $3.19 to settle at $97.24.

Crude futures trading volumes remained light approaching the Christmas holiday. Brent volume was 18 percent below its 30-day average, while U.S. volume lagged its by 36 percent.

Brent's premium to U.S. crude remained above $9 a barrel.

Key industrial metal copper neared a one-week high, also supported by the weaker dollar and the economic data. <MET/L>

Diplomats met in Rome on Tuesday to discuss further sanctions against Iran, including a possible European Union oil embargo against Tehran, diplomatic sources said.

"This rebound on Iranian headlines could be seen as a repeat of last Tuesday's rally ... and could meet with a similar reversal ... absent an actual supply disruption," Tim Evans, energy analyst for Citi Futures Perspective in New York.

Oil rose 2 percent on December 13 on concern Iran might shut the key Strait of Hormuz waterway, only to drop more than 4 percent the next day on revived euro zone debt crisis worries.

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Graphic on Iran's oil customers: link.reuters.com/dab65s

Sanctions imposed on Iran: link.reuters.com/had45s

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SUPPLY DISRUPTION FEARS

Concerns about supply disruption extended to Kazakhstan where sacked workers demanded to know who ordered police to fire on protesters in the Central Asian state estimated to produce 1.6 million barrels per day (bpd) of crude, similar to Libya's output before its civil war.

Iran has invited the U.N. International Atomic Energy Agency to visit for talks, after the IAEA's report last month pointed to military links to Tehran's nuclear program and as Iran faces tightening sanctions.

Gulf Arab leaders meeting in Saudi Arabia endorsed Saudi King Abdullah's call to form a "single entity" after hinting at Iranian threats. The six-member Gulf Cooperation Council pledged closer military and security integration.

Developments in neighboring OPEC-producer Iraq after the departure of U.S. forces also have warranted oil-investor concern. Iraq issued an arrest warrant for Sunni Vice President Tareq al-Hashemi after the government obtained confessions linking him to what an official called terrorist activities.

U.S. OIL INVENTORIES

U.S. crude futures fell 4.6 million barrels last week, more than analyst expectations, industry group American Petroleum Institute said in its weekly report released after oil prices settled.

Distillate stockpiles fell 2.8 million barrels and gasoline stocks fell 394,000 barrels, the API said, with both crude oil and products imports slipping.

Ahead of the API report, crude stockpiles were expected to have fallen 2.3 million barrels last week, a Reuters survey of analysts showed.

Distillate stocks were expected to be down only 400,000 barrels and gasoline stocks to be up 1.2 million barrels.

U.S. gasoline demand last week was off 4.4 percent from year ago, though posting a slight, 0.2 percent rise from the previous week, MasterCard said in a separate report.

The weekly oil inventory report from the U.S. Energy Information Administration is due at 10;30 a.m. report following on Wednesday morning.

(Additional reporting by Gene Ramos and Jeffrey Kerr in New York, Simon Falush in London and Manash Goswami and Francis Kan in Singapore; Editing by Dale Hudson and David Gregorio)