The price of oil jumped to near $86 a barrel on Tuesday as markets weighed the effects of sanctions against Iran and the possibility that Tehran could block a key Middle East shipping route.
By early afternoon in Europe, benchmark oil for August delivery was up $2.12 at $85.87 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.21 to close at $83.75 in New York on Monday.
In London, Brent crude for August delivery was up $2.58 at $99.93 per barrel on the ICE Futures exchange.
Crude plunged to $77 last week from $106 two months ago on expectations that slowing growth in the U.S., Europe and China would reduce oil consumption.
However, some analysts say investors have been too pessimistic about the global economy and, outside of Europe, crude demand has held up so far.
"While much of the severe sell-off in crude oil prices in May and June has been driven by fear of what could happen to world oil demand, we have not witnessed a collapse in demand yet," analysts at Goldman Sachs said in a report.
Traders are closely watching the impact of tighter sanctions starting July 1 by the U.S. and Europe against Iran over the country's nuclear program. Iran, OPEC's second-biggest producer, is finding fewer countries willing to buy its crude, which could pinch global supplies.
"U.S. and E.U. sanctions against Iran are now in effect, and look to have a greater impact than we had anticipated," said Goldman Sachs, which forecasts oil will surge to $115 within three months. "The loss in Iranian exports could soon rival the loss of Libyan crude oil supplies last year."
Additionally, Iran is mulling the option of blocking access by oil tankers to the Strait of Hormuz and a weeklong strike by oil workers in Norway was seen cutting into production at the world's eighth-largest oil exporter.
"The recovery has been aided by supply-side risks, which until recently tended to be overlooked," said analysts at Commerzbank in Frankfurt.
In other energy trading, heating oil was up 5.44 cents at $2.7303 per gallon while gasoline futures advanced 5.38 cents at $2.6777 per gallon. Natural gas lost 2.6 cents at $2.798 per 1,000 cubic feet.
Alex Kennedy in Singapore contributed to this report.