Brent above $108 on Iraq, Iran worries

LONDON, Dec 27 (Reuters) - Oil prices edged up on Tuesday, supported by fears of supply disruptions and Iranian naval exercises in a crucial oil shipping route, with gains capped by simmering euro zone debt concerns.

Brent crude rose by 10 cents to $108.06 per barrel by 1428 GMT and U.S. crude was up 20 cents to $99.88 a barrel, having previously traded slightly above $100.

"The year 2011 may be remembered in the annals of oil market history as the year of the supply shock," analysts from JBC Energy led by David Wech said in a note.

"While the quicker-than-expected return of Libyan production has contributed to a general view that supply in 2012 will be ample, we would argue that this need not be the case".

"The strong uptick in sectarian violence across Iraq is a serious cause for concern, as it could set back Iraqi production targets by years ... Iran also presents a major wild card," JBC said.

Iran on Saturday began 10 days of naval exercises in the Strait of Hormuz. On Monday it warned that the flow of crude could be stopped from the Strait of Hormuz, one of the world's most strategic oil transit channels. in the event of sanctions against its oil.

"If they (the West) impose sanctions on Iran's oil exports, then even one drop of oil cannot flow from the Strait of Hormuz," official news agency IRNA quoted Iran's first vice-president Mohammad Reza Rahimi as saying.

Broader oil sanctions against Iran have been one of the main fears in the oil market in the past months, although hopes are high that Saudi Arabia and other Gulf OPEC producers might help replace those supplies.

In Iraq, at least seven people were killed when a suicide car bomber hit the interior ministry on Monday in the latest attack since a crisis erupted between the Shi'ite-led government and Sunni leaders a week ago.

Syria said on Saturday its oil production had fallen by a third due to international sanctions imposed over its nine-month crackdown on anti-government protests.

Worries about supply disruptions were offset by concerns that Europe's debt crisis might have broad consequences on oil demand going far beyond just crippling consumption in Europe.

Leaders of Germany's major business and industry groups said they expected the economy to lose momentum, although there will be no recession in 2012.

In an illustration of how far problems could go in a crippled European refining sector, Swiss refiner Petroplus said lenders had frozen about $1 billion in borrowing allowances it uses to buy oil, meaning supplies for Europe's largest independent refiner could dry up within days.

"On the macro side there are no great changes: the Italian 10-year bond yields are still very close to 7 percent, and we still have to wait for S&P to announce which European countries it downgrades and if France is one of those," said Olivier Jakob from Petromatrix consultancy.

In a sign of growing uncertaincy, speculators cut their net long positions in Brent crude and gasoil futures and options in the week to Dec. 20, data from the IntercontinentalExchange showed

It mirrored similar U.S. data released last week, which showed that the number of hedge funds on the speculative long side of U.S. crude was at its lowest level since the end of August 2010, when the second round of U.S. quantitative easing was announced, according to Petromatrix.

Prices were supported by positive U.S. data where new single-family home sales rose to a seven-month high in November and the months' supply of houses on the market was the lowest in 5-1/2 years, adding to signs of a recovery in the sector.

Investors will be looking for more positive signs from U.S. data this week, including the S&P Case-Shiller house price index for October and U.S. consumer confidence for December. (Reporting by Dmitry Zhdannikov; Editing by William Hardy and Jane Baird)