Brent was steady above $123 a barrel on Friday, as the possibility of supply disruptions put a floor under a market that fell sharply in the previous session on weak manufacturing activity in China.
The potential loss of Iranian crude supplies amid tightening Western sanctions and news that the International Energy Agency (IEA) was not planning to release reserves from strategic storage as of now also supported oil markets.
The Iran situation has a long way to run and that will keep the market tight and support crude oil, said Tony Nunan, a risk manager with Mitsubishi Corp in Tokyo. The market had fallen enough yesterday and trading will be locked in a range for now.
Brent crude rose 39 cents to $123.53 a barrel by 0758 GMT. The benchmark is set to fall 1.8 percent this week, after ending flat in the previous week.
U.S. crude was up 40 cents at $105.75, and is poised for a 1.2 percent drop this week, its second straight weekly decline.
But weak economic data from the euro zone and top energy consumer China kept a lid on gains.
Brent could trade between $115-$125 a barrel in the short-term, as the threat of supply disruptions is offset by seasonally low demand for oil in the second quarter, Nunan said.
Analysts polled by Reuters hiked their forecast for Brent oil prices this year by $4 to $114.30 a barrel, citing the concerns that supply losses could grow as a European Union (EU) ban on Iranian crude takes effect on July 1 and Asian countries face pressure from Washington to cut purchases from Iran.
In addition to the risk of an Iranian disruption, adverse weather, technical glitches and unrest in Syria, Yemen and Sudan has taken an estimated 1.1 million barrels per day of oil production offline, according to Reuters calculations.
With the current market fundamentals characterized by extremely low inventories and stretched spare capacity, oil prices are likely to remain high, said analysts at Barclays Capital in a report.
Major buyer South Korea cut imports of Iranian crude in the first two months of 2012, joining Taiwan and South Africa as the latest in a growing group of buyers bowing to international pressure on the Islamic Republic.
In a concession to Asian buyers, the EU will allow some insurance on Iranian oil shipments before the bloc's full embargo starts on July 1, member states agreed on Thursday.
U.S. data reflecting an improvement in the country's job market raised hopes of a sustained recovery in the world's biggest oil consumer.
The number of Americans claiming new unemployment benefits dropped to a four-year low last week, offering further evidence the jobs market recovery was gaining traction.
But analysts warned that U.S. momentum could slow if the global economy keeps sliding.
The macroeconomic picture is getting better, especially in the U.S., and that's helping oil prices. But the recovery is very slow and there's still a lot of uncertainty regarding China and Europe, said Ken Hasegawa, a commodity derivatives manager at Newedge Brokerage in Tokyo.
In Cushing, Oklahoma, the delivery point for U.S. traded crude oil futures, U.S. President Barack Obama reiterated his pledge to speed up the approval for the southern leg of the Keystone XL pipeline that would ship crude from the glutted Midwest to the refinery hub at the Texas Gulf Coast.
We believe that prompt or 2013 WTI values should not strengthen on news that President Obama may be expediting the southern leg of the Keystone XL project, given that the start-up date will still be 2014, the Barclays report said.