03/07/2012 11:38 EST | Updated 05/07/2012 05:12 EDT

Oil rises above $105 in Europe amid optimism US economy, demand will improve

Oil prices rose above US$105 a barrel Wednesday amid expectations that an improving U.S. economy will eventually boost crude demand, while inventory supplies increased last week.

The benchmark oil for April delivery was up 98 cents to $105.68 on the New York Mercantile Exchange. The contract fell $2.02 to settle at $104.70 per barrel in New York on Tuesday.

On Wednesday morning, the U.S. Energy Information Administration reported that supplies rose to 800,000 barrels for the week ending March 2, far lower than the expectations of a 2 million barrel increase from analysts.

Crude has jumped from $75 in October because of diplomatic tensions with Iran, a major oil producer, and as U.S. economic indicators including employment have slowly improved over the last few months.

The government is scheduled to announce February jobs figures on Friday.

Some analysts are worried higher fuel costs will undermine consumer spending and economic growth while others say the economy is strong enough to absorb the higher prices.

"We are watching crude oil rise because this is what happens when economies grow," said Carl Larry of Oil Opinions and Outlooks. "$100 crude or $140 crude are not going to slow economic growth."

Others were less buoyant.

"A few Wall Street financial institutions have started to push the concept that crude oil is not at $125 a barrel because of geopolitical events but because of very strong demand," said Olivier Jakob of Petromatrix in Switzerland.

"The very strong demand is, however, in our opinion, not very visible."

Crude rose above $110 last week but retreated from that level after Iran agreed Tuesday to let international nuclear inspectors into its facilities. Western powers have confronted Iran in recent months over its nuclear program and Iran has threatened to shut off a strategic waterway for oil tankers. The announcement eased concerns about a possible disruption to oil supplies around the globe.

"The supply risks generated by the Iran crisis continue to lend support to prices and are thus preventing any sharper price slump," said a report from Commerzbank in Frankfurt, while clarifying at the same time that "there is still no evidence of any tightening of supply."

The American Petroleum Institute said late Tuesday that crude inventories rose 4.6 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 2 million barrels.