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Oil prices rose above $78 a barrel on Monday as heightened tension between Iran and Western nations raised speculation over a potential supply risk, encouraging investors to push prices higher. Prices were also supported by a weaker US dollar, following dovish comments from US central bankers and a surge in gold to a new record after concerns over accelerating inflation and weak economic growth prompted investors to cut risk.
Higher resource stocks helped boost Asian stocks. US crude for January delivery rose 71 cents to $78.18 a barrel by 0416 GMT. The December contract, which expired on Friday, settled down 74 cents at $76.72 a barrel, weighed down by a stronger dollar and concerns about the energy demand outlook. London Brent crude gained 75 cents to $77.95.
Iran's armed forces launched air defence war games on Sunday to show off the country's deterrence capabilities in the face of Western pressure over its nuclear programme, and a cleric in the Revolutionary Guards warned the Islamic republic would fire missiles at "the heart of Tel Aviv" if attacked.
"There's always a supply rise risk premium that can arise from these elevated tensions in the Middle East and that is a factor pushing up oil prices this morning," said Toby Hassall, a commodities analyst at the Commonwealth Bank of Australia.
Iran's threats came a day after senior officials from six world powers said they were disappointed Iran had not accepted proposals intended to delay its potential to make nuclear weapons, with US President Barack Obama having warned that there could be a package of sanctions against Iran within weeks.
Thanks to a weak dollar and signs of a global economic recovery, oil prices have gained about 75 percent so far this year, although they are still nearly 47 percent off their high of more than $147 a barrel in July 2008. Still, analysts said oil prices have been trading within the $75-$82 band of the past one month and would need a lot more upside pressure to leap out of the $82 levels.
Barclays Capital said in a research note on Friday the upside would also probably be capped by Opec, which has indicated that any quick run-up in prices is likely to be met by a proactive approach to calm them, and until distillate demand showed some sustained improvements.
With a raft of economic data on tap in the United States in a holiday-thinned week, including existing home sales on Monday, revised GDP figures on Tuesday and the minutes of Fed's last policy meeting the day after, investors are set to scrutinise the numbers for signs of economic activity perking up in the world's top oil consumer.
Separately, China's apparent oil demand rose 10.3 percent from a year earlier, its second double-digit gain since August 2006, Reuters calculations based on official data showed on Monday. Money managers boosted net long crude oil positions on the New York Mercantile Exchange in the week through November 17, the Commodity Futures Trading Commission said in a report on Friday.

Copyright Reuters, 2009

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