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Middle East Tensions Send Crude Up More Than 1%

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Oil futures rose more than 1% Friday, as escalating hostilities between Israel and Palestinian militants renewed fears about a broader conflict that would disrupt supplies of Midle East crude oil.

The gains came after Israel intensified its air campaign on the Gaza Strip and militants there ramped up their rocket attacks deep into Israeli cities. Israel began mobilizing tens of thousands of troops on the Gaza border, leaving observers fearful that the hostilities could heat up further.

Egypt's new government voiced support for Hamas on Friday by dispatching its new prime minister to Gaza, an unprecedented show of support for such a senior Egyptian official.

Although none of the countries involved are major oil producers, the flare-up has raised fears that the conflict could spread to other countries in the region.

"Your big concern is that this ends up regionalizing," said Bill O'Grady, chief market strategist at Confluence Investment Management. The oil market tends to price in the worst-case scenario, Mr. O'Grady added.

Light, sweet crude for December delivery, which expired at the close of trading Friday, settled $1.22, or 1.4%, higher at $86.67 a barrel on the New York Mercantile Exchange. The more actively traded January contract settled $1.05, or 1.2%, higher at $86.92 a barrel.

Brent crude on the ICE futures exchange settled 94 cents, or 0.9%, higher at $108.95 a barrel.

Oil prices had been on a steady downward path for much of the autumn, as the market shifted its attention to weakening global oil demand and rising supply, particularly in the U.S. On Friday, the American Petroleum Institute said U.S. crude demand fell 2.3% in October to the lowest level for that month in 17 years.

"The simple fact is that unemployment remains high and economic growth has been extremely modest," said John Felmy, the industry group's chief economist. "Petroleum demand is reflecting that."

But the Israeli conflict has reminded oil market participants that the prospect of supply disruptions can still move prices. "There are a lot of things pushing us lower, but this is an attention-getter," said Peter Donovan, vice president at oil options brokerage Vantage Trading in New York.

Oil market participants have been closely following the recent flare-ups in the Middle East since last year's Arab Spring upended longstanding regimes in the region.

Analysts say it's unlikely that other countries, like Egypt, will get involved, but such a possibility remains on the mind of oil traders. Egypt is not a major oil producer, but it is home to two major oil choke points: the Suez canal and the SUMED pipeline.

Together, they shuttle about 3.8 million barrels of oil and petroleum products a day between the Red Sea and the Mediterranean, according to the U.S. Energy Information Administration.

"What's going on in Gaza right now is one of those stories that does not have a direct tie-in to any volume of oil," said Greg Priddy, analyst at the Eurasia group, who does not expect the conflict to spread. But it raises a "general fear that something is going to happen."

Also of concern to oil market participants is the longstanding confrontation between Iran and western countries over Tehran's nuclear program. That has left traders worried that Iran could shut down the Strait of Hormuz, through which 17 million barrels of oil and petroleum products pass every day.

Front-month December reformulated gasoline blendstock, or RBOB, settled 1.39 cents, or 0.5%, higher at $2.7101 a gallon. December heating oil settled 1.33 cents, or 0.5%, higher at $2.9868 a gallon.

Copyright (c) 2012 Dow Jones & Company, Inc.

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