Oil climbs on Iran tensions, dollar slip

(Reuters) - Oil prices rose 2 percent on Friday on support from the continuing tensions over Iran's disputed nuclear program and the potential for supply disruptions in the region along with the weaker dollar.

Crude futures were on pace to post small weekly losses, but rose on Friday after slumping the previous session on news that the United States and Britain were preparing a release from strategic oil reserves later this year.

U.S. consumer prices rose the most in 10 months in February as the cost of gasoline spiked, but there was little sign that underlying inflation pressures were building up.

The dollar weakened after that report on U.S. consumer prices was seen as reducing the likelihood of the Federal Reserve tightening monetary policy anytime soon.

"The reasoning is that the Fed will not be as likely to pull back on stimulus or raise interest rates, so the dollar weakened and that pushed up oil, along with the uncertainty about Iran and the SPR," said Phil Flynn, analyst at PFGBest Research in Chicago.

Oil investors shrugged off a dip in U.S. consumer sentiment. Flynn attributed this to the survey's director indicating that $4 a gallon gasoline did not have the "shock value" it had in previous fuel price surges.

Brent May crude rose $2.42 to $125.02 a barrel at 1:37 p.m. EDT (1737 GMT), having swung from $122.45 to $125.09.

U.S. April crude rose $1.16 to $106.27 a barrel, having reached $106.38.

Brent's premium to U.S. crude, now comparing May contracts, hovered just above $18 a barrel.

Trading volumes in both contracts were lackluster, more than 45 percent below the 30-day averages with several hours left in the trading session.

Oil briefly trimmed gains on news that Saudi Arabia is preparing to extend this year's unexpected surge in oil sales to the United States, according to tanker industry sources and government data.

Contrary to expectations that the modest recent rise in Saudi Arabia's output was bound for fast-growing Asian markets that also might need to replace barrels from Iran, preliminary data shows that shipments to the United States have without fanfare risen 25 percent to the highest level since mid-2008.

U.S. CORE INFLATION EYED

The Labor Department said the Consumer Price Index rose 0.4 percent in February and that gasoline accounted for more than 80 percent of the rise. But excluding the food and energy categories, inflation pressures were generally contained, with the core CPI edging up only 0.1 percent.

In a separate report, the Federal Reserve said production at the nation's mines, factories and utilities held steady last month after an upwardly revised gain in January.

U.S. consumer sentiment dipped in early March as rising gasoline prices pushed Americans' inflation expectations for the next year higher, the Thomson Reuters/University of Michigan's preliminary reading on consumer sentiment showed.

IRAN AND RESERVE RELEASES

European Union diplomats are debating whether to exempt some insurers from a ban on dealing with Iranian oil shipments after Asian oil importers lobbied for exceptions to ensure oil deliveries, government and industry sources said on Friday.

The diplomatic wrangling comes ahead of an EU foreign ministers meet on March 23 and an EU ban on importing Iranian oil slated for July.

A group of Democratic lawmakers in the U.S. House of Representatives is urging President Barack Obama to aggressively use the threat of releasing oil from the strategic petroleum reserve (SPR) to rein in speculators the lawmakers believe are driving up oil prices.

"We have to consider that an SPR release is an option that the U.S. administration is seriously considering. According to AAA, the New York state average for regular unleaded has also crossed the $4 per gallon mark," said Olivier Jakob of Petromatrix in a note.

(Additional reporting by Gene Ramos in New York, Jessica Donati in London and Randy Fabi in Singapore; Editing by Lisa Shumaker)