Oil surged above $111 a barrel on Thursday on renewed worries over potential supply disruptions from the Middle East as a war of words escalated between Israel and Iran.

Israeli Prime Minister Benjamin Netanyahu is due to set a "clear red line" for Iran's nuclear drive when he speaks later today at the United Nations.

Comments from Iran about "neutralizing" all efforts to sabotage its nuclear facilities had already pushed oil higher in earlier trade.

Uncertainty over a bailout for Spain and wrangling over Greece's debt highlighted the difficulty Europe is facing in tackling its problems, weighing on broader markets from Asian shares to the euro and gold.

Brent crude leapt more than $1 to trade at $111.25 and by 1130 GMT was up $1.20 at $111.24. US oil gained $1.06 to trade at $91.04.

"The ongoing geopolitical tensions in the Middle East plus the prospect of further injections of liquidity by the central banks make any further decrease unlikely," said a Commerzbank research note.

Iranian President Mahmoud Ahmadinejad said in a speech before the U.N. General Assembly that Iran is under threat of military action from "uncivilized Zionists", a clear reference to Israel.

Oil also gained support from data that showed crude and refined product stockpiles in the United States, the world's biggest oil consumer, fell unexpectedly last week as crude imports plunged.

Domestic crude stocks declined by 2.45 million barrels to 365.18 million barrels, the Energy Information Administration said, against a forecast increase of 900,000 barrels.

Gasoline inventories dropped by 481,000 barrels to 195.83 million barrels, against expectations of an increase of 200,000 barrels. That in part helped U.S. RBOB gasoline futures jump 11.40 cents, or 3.8 percent, on Wednesday.

The market is now eyeing Spain which will announce a series of economic reforms and a tight 2013 budget on Thursday.

"There is a lot of nervousness built into tonight's Spanish budget, and video footage of out of control riots are not helping to build confidence," Ben Taylor, a sales trader at CMC Markets, said in a report.

"I think the markets will push Spanish Prime Minister Mariano Rajoy's hand into asking for a bailout."

Demonstrators this week clashed with police on the streets of Athens and Madrid in an upsurge of popular anger at new austerity measures being imposed on two of the euro zone's most vulnerable economies. – Reuters