Oil slips from 11-month high after Saudi fire denial

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Brent crude futures slipped below $126 on Friday after surging 5 percent to an 11-month high a day earlier, as fears of a supply disruption from Saudi Arabia eased, calming nervous investors who now expect oil demand to fall in the next few weeks.

Oil prices soared on Thursday after an Iranian report of a pipeline fire at top exporter Saudi Arabia sparked a buying frenzy. Prices later pared gains after CNBC cited a Saudi oil official as saying the report was untrue.

Front-month Brent slipped 56 cents to $125.64 a barrel by 10am UAE time, after settling up $3.54 at $126.20 in the previous session, its highest since April 8, 2011.

Brent topped $128 a barrel in late post-settlement trade on Thursday, reaching levels not seen since July 2008, when the growing economic crisis drove oil to record peaks of more than $147 a barrel.

US oil edged down 27 cents to $108.57 a barrel after settling $1.77 higher at $108.84.

Markets have been on edge this year due to threats of supply disruptions caused by the West's standoff with Iran over its nuclear program and actual production losses from South Sudan, Yemen, Syria and the North Sea.

But barring an escalation in the standoff with Iran, analysts said warmer weather in Europe and Asia following the end of winter would weigh on prices in the next few weeks.

"Oil prices have overshot in the short-term, and with warmer temperatures as we move from winter to spring, oil demand could start to fall, starting in March," said Gordon Kwan, head of energy research at Mirae Asset Management in Hong Kong. "Brent could fall back below $120 if Iran doesn't flare up."

Iran, the world's fifth largest oil producer, has been struggling to sell its crude in the face of tightening US sanctions and a European Union embargo that kicks in on July 1. This has threatened to tighten global crude supplies.

However, US Energy Secretary Steven Chu said global oil producers have enough spare production capacity to make up for a drop in Iranian exports.

Oil prices have also been underpinned this week by positive manufacturing data out of China, easing fears of a sharp drop in demand from the world's second biggest oil consumer, and a flood of cheap funds from the European Central bank.

"China's PMI has increased for three consecutive months, suggesting a sustainable recovery in manufacturing activities is now occurring," analysts at ANZ Bank said in a research note.

The probability of a sharp global slowdown has eased due to recent policy measures adopted in the euro zone to tackle its debt crisis, the International Monetary Fund said on Thursday, but it warned risks to world growth remain "squarely to the downside".

In the short term, Brent will retest a resistance at $126.53 per barrel, while US crude will test a resistance at $110.95 per barrel, according to Reuters market analyst Wang Tao.

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