Iran crisis drives oil prices skyward

New York's main contract, light sweet crude for April, soared almost $2 a barrel, closing above $109 for the first time since May.

The benchmark West Texas Intermediate contract settled at $109.77, up $1.94 from Thursday's closing level.

Meanwhile, Brent North Sea crude for delivery in April shot up $1.85 to $125.47.

"Oil prices are continuing to soar on the back of the Iran crisis," said Commerzbank analyst Carsten Fritsch.

Iran has been hit by a raft of economic sanctions by the United States, United Nations and the European Union over its refusal to halt uranium enrichment activities.

The Islamic republic insists that its nuclear program is solely for civilian purposes and has threatened to cut off crude exports to Europe after the European Union announced it would stop buying Iranian oil.

"Since the European embargo against Iranian crude oil was agreed on in late January, Brent crude has rallied strongly as the risk premium... entered the market," said SEB commodities analyst Filip Petersson.

"The immediate ban on new contracts and the cancellation of old ones from July 1 are clearly starting to put additional pressure on market balance expectations. Consumers are racing to secure supply."

The spike in oil prices has triggered concerns about the global economy at a time of slowing growth mainly due to the eurozone debt crisis.

"We don't see the recent move in oil prices as detrimental to the global economic recovery (yet)," Lauren Rosborough of Societe Generale wrote in a research note.

"However, higher oil prices increase the fragility of any economic recovery."

The Iran tensions have darkened the global oil supply outlook, which is already stretched by lower output from South Sudan, Syria and Yemen.

"Supply from South Sudan and Syria is down, Libya is not back to pre-war capacity, unrest is still widespread in both the Middle East and North Africa region and Nigeria, and in addition North Sea deliveries continue to disappoint," said SEB's Petersson.