Crude-oil futures jumped 2.7% Monday after fighting between Israel and Palestinian militants intensified, raising the threat of a broader conflict in the oil-rich Middle East.
Israeli airstrikes Monday hit crowded areas of the Gaza Strip, targeting the homes of Hamas activists and raising the Palestinian death toll to more than 90. Meanwhile, Hamas fighters fired dozens more rockets at Israel.
Thousands of Israeli troops are gathering on the Gazan border in preparation for a ground invasion even as regional leaders tried to broker a ceasefire.
Oil traders are watching the situation closely, concerned Egypt or other nations could be drawn into the fighting, leading to a disruption of crude-oil shipments through ports and pipelines.
"Nobody knows if there will be a ceasefire. Nobody wants a war, but nobody seems to know how to stop it," said Phil Flynn, an energy analyst at Price Futures Group. "If it does spread, that would be a concern" for oil markets.
Light, sweet crude for January delivery rose $2.36 to $89.28 a barrel on the New York Mercantile Exchange, the highest settlement since Oct. 19. Brent crude on the ICE futures exchange traded $2.38 higher at $111.33 a barrel.
Egypt, along with Turkey and Qatar, are helping in ceasefire negotiations, but investors are concerned further escalation could draw in regional powers such as Egypt or Iran and disrupt oil supplies.
Egypt isn't a major oil producer, but two major oil choke points--the Suez Canal and the Sumed pipeline--run through the country. The two transportation routes move 3.8 million barrels of oil a day, according to the U.S. Energy Department.
In the past, Iran has threatened to close the Strait of Hormuz, which would prevent roughly a fifth of the world's oil from reaching the market.
Carl Larry, head of trading advisor Oil Outlooks and Opinions, said it is unlikely the conflict will spread. But investors aren't taking any chances.
"You could be on the wrong side of that trade really quickly," said Mr. Larry.
The latest Middle East flare-up has reversed the trend of falling oil prices. Rising supplies and weak demand have weighed on U.S. and European oil futures over the past two months, sending U.S. crude oil down from a peak of $99 a barrel hit in September. But the threat of supply disruptions has prompted traders to wager that prices could surge higher.
Meanwhile in the U.S., more conciliatory statements from Republican and Democratic leaders have raised hopes Congress will reach an agreement on the package of tax increases and budget cuts set to begin at the start of the year.
The so-called fiscal cliff has weighed on stock markets, oil and other commodities as investors worried the U.S. could fall back into recession if no action is taken.
Front-month December reformulated gasoline blendstock, or RBOB, settled 4.44 cents higher at $2.7545 a gallon. December heating oil rose 8.83 cents to $3.0751 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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