Brent crude rose above $123 a barrel on Thursday, after sharp falls in the previous session, lifted by growing concerns over Iranian supplies being disrupted due to Western sanctions.

In a move that could further limit exports from Iran and tighten global crude supply, a key Chinese insurer will halt indemnity coverage for tankers carrying Iranian oil, sources said on Thursday.

China is Iran's top buyer of crude and this is the first sign the country's refiners may struggle to obtain the shipping and insurance to keep importing from OPEC's second-biggest producer.

This comes days after sources told Reuters Japanese refiners planned to cut crude imports from Tehran yet again in April as they shy away from renewing annual contracts.

Oil markets are supported by supply issues and some short covering, because demand fundamentals are not that strong, said Ken Hasegawa, a commodities derivatives manager at Newedge brokerage in Tokyo.

Front-month Brent crude rose 94 cents to $123.28 a barrel by 0602 GMT, after settling down $2.52 at $122.34 on Wednesday. U.S. crude futures gained 73 cents to $102.20, after falling $2.54 in the previous session.

Oil prices fell sharply on Wednesday after a government report showed U.S. crude stockpiles rose by 16.1 million barrels in the second half of March, their largest two-week gain since 2001 and far beyond analysts' estimates.

Analysts said while the Iranian situation is unlikely to be resolved this year, an escalation to military conflict is also highly improbable.

While the situation does have the potential to turn hotter in 2013, and to possibly do so later this year, we suspect that in the interim the oil market may lose focus on the Iranian situation and for it to temporarily cease to be a major market driver, Barclays Capital said in a report.

ECONOMIC OPTIMISM

Prices were also supported by fresh signs of a recovery in the U.S. economy and easing fears of a sharp slowdown in China.

A report showing U.S. businesses added 209,000 jobs in March slightly beat expectations and raised hopes for a positive nonfarm payrolls report on Friday.

The key jobs report for March from the U.S. Labor Department is expected to show a gain of 203,000 jobs, including a rise in private payrolls of 218,000.

Sentiment over China's economic prospects also strengthened after the services sector expanded again in March and business confidence hit an 11-month high, though overall activity remained below its long-term average, a private sector survey of purchasing managers showed on Thursday.