(Reuters) - Brent crude rebounded to over $124 a barrel on Friday as attention returned to restricted Iranian exports and global outages that are trimming spare capacity, following a steep drop in prices the previous day.
A weaker dollar also supported oil, as it slipped unexpectedly following a report that showed consumer sentiment in the U.S. was dropping.
"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.
Brent crude was up $1.65 at $124.25 a barrel at 1444 GMT, while U.S. crude was 65 cents higher at $105.76 a barrel around the same time.
Oil lost as much as $3 on Thursday after Reuters reported that a formal request from the United States to Britain to join forces in a release of oil from emergency reserves was expected to follow a meeting in Washington between President Barack Obama and Prime Minister David Cameron.
"Spare capacity is really very tight, and any natural disaster or problem in the Middle East could be a real problem," said Rob Montefusco, an oil trader at Sucden Financial, highlighting supply stoppages in Syria, Sudan and elsewhere.
"No one wants to go home short at the weekend," he added.
Tighter rules on Iran are also threatening to disrupt oil shipments to Asia, and oil buyers in the East called for Western officials to revise sanctions that may prevent insurers from indemnifying vessels.
EU diplomats are divided on whether to exempt some insurers from a ban on dealing with Iranian oil shipments.
In a further sign Iran's isolation is growing, the SWIFT system that handles most cross-border payments said on Thursday it would disconnect Iranian institutions blacklisted by sanctions.
Western sanctions, due to come into effect within a few months, have helped boost Brent crude oil prices by nearly 14 percent so far this year, stoking fears that higher fuel prices could derail economic growth in the United States.
Earlier this week the International Energy Agency (IEA) warned that supply outages were eroding oil stocks and called inventories "very tight in absolute terms".
GASOLINE
Rising gasoline prices are putting pressure on the U.S. government to take action, and Washington may be tempted to tap the 727 million barrel U.S. Strategic Petroleum Reserve. U.S. consumer prices in February rose by the most in 10 months as the cost of gasoline spiked, a government report showed on Friday.
"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.
The U.S. economy is bouncing back from a prolonged slowdown, but surging pump prices could derail the recovery and annoy U.S. motorists, who consume around a third of world gasoline supplies.
U.S. economic data on Thursday was supportive for oil prices and added to a recent spate of good news about the pace of recovery.
The use of strategic reserves by consumer nations would follow last summer's concerted 60 million-barrel release by the 28-member IEA, which was intended to fill the supply gap caused by Libya's civil war.
But the Paris-based IEA said last month it saw no reason to resort to SPR releases in the near future. Last year's move was unanimously agreed among IEA members, but countries including Germany and Italy have voiced reluctance to tap reserves again.
