Brent crude oil prices rose for a second straight day on Thursday, underpinned by strong U.S. equities markets, while U.S. crude's discount to Brent fell below $10 for the first time since June 2012.
Traders noted U.S. Defense Secretary Chuck Hagel's midmorning comments that U.S. intelligence confirmed Syria's possible use of chemical weapons, which sent jitters through the market and pushed Brent and U.S. crude prices up to intraday highs.
U.S. stocks also rose on Thursday, boosted by gains in shares of materials and telecoms companies.
"Is the equity market a true reflection of supply and demand fundamentals? I don't know, but I'm watching the equity markets rising and U.S. crude's going along with it," said Michael Korn, president of Skokie Energy in Princeton, New Jersey.
"That said, the geopolitical dimension to the market trumps any macroeconomic data" in the short term, he added, referring to the defense secretary's comments.
Brent has risen in five of the last six trading sessions but is still down more than 6 percent from the beginning of April. U.S. crude has risen for seven out of the last eight trading sessions but remains down nearly 5 percent from April 1.
"The rally here is because the longs had reached the saturation point when U.S. crude got to about $95. They sold off to about $85, which is very long-term support," said Korn.
The spread between the front-month Brent crude oil futures contract and the U.S. crude oil futures contract (WTI) narrowed to as little as $9.94 a barrel before moving back above $10. It is down from over $20 a barrel in mid-February.
A spread lower than $10 "would make barge shipment out of the U.S. midcontinent unprofitable," Citi Futures Perspective analyst Tim Evans wrote in a research note.
"We're essentially getting down to pipeline or shipping economics," said Stephen Schork, editor of The Schork Report in Villanova, Pennsylvania.
U.S. crude had been trading at a wide discount to Brent because of large inventory builds at key pricing point Cushing, Oklahoma. But pipelines are now taking more crude to the U.S. Gulf Coast, alleviating the supply pressure at Cushing.
"The reversed Longhorn pipeline in West Texas seems to have been successful in this case," said David Wech, an analyst at JBC Energy in Vienna.
The weaker U.S. dollar, which was off 0.47 percent against a basket of currencies, was helping underpin oil prices. A weaker dollar makes commodities priced in dollars more affordable for buyers using other currencies.
But analysts said doubts were creeping back into the market after a rally late on Wednesday that followed the weekly U.S. crude oil and products inventory data and better-than-expected South Korean growth data.
South Korea's economy expanded in the first quarter at its fastest pace in two years, but customs figures, which measure the value of exports, painted a less rosy picture.
Bjarne Schieldrop, chief commodity analyst at SEB, said South Korea was seen as "the canary in the coal mine" because of its industrial order book, as it produces so many components. "But it looks as if that first-quarter growth was more to do with front-loaded government spending," he said.
Analysts also cautioned against a bullish interpretation of Wednesday's weekly U.S. gasoline stockpile data, which saw inventories down 3.9 million barrels week-on-week.
"The drop in gasoline stocks was driven by lower refinery production, not just an increase in demand," said Carsten Fritsch, an oil analyst at Commerzbank in Frankfurt. "If you look at the seasonal pattern, it isn't unusual for gasoline stocks to fall at this time of year."
Analysts and traders said the technical picture remained bearish, pointing to weak global demand growth and abundant supplies from the North Sea, the Middle East and North Africa.
At least nine May cargoes have been moved forward in the North Sea Forties crude program after stronger-than-expected output from Britain's Buzzard oilfield, the biggest contributor to the Forties stream.
In addition, production from Iraq, Libya and the United States continues to rise, raising questions as to whether Saudi Arabia, Kuwait and the United Arab Emirates will have to cut their output.
Meanwhile on the demand side, discouraging economic data remains the norm. Orders for durable U.S. manufactured goods recorded their biggest drop in seven months in March, and a gauge of planned business spending rose only modestly.
And although UK gross domestic product showed a 0.3 percent rise in the first quarter, this was partly linked to the bounce back in North Sea oil and gas output, alongside service sector growth.