Oil surged more than 2 per cent to a record high near $77 a barrel today on renewed worries over supply from major exporter Nigeria and as conflict between Israel and Lebanon heightened international tensions.
Prices also rose as the Iran nuclear dispute headed back to the UN Security Council, North Korea walked out of talks with South Korea and crude inventories in top consumer the United States fell more than expected.
"Geopolitical tensions have stepped up - we are moving on to a new phase in Iran and Israel," said Mike Wittner of investment bank Calyon.
"In the end, geopolitical risk is about a current supply disruption getting worse or a new one happening."
Front-month US crude settled up $1.75 at $76.70 a barrel after hitting a record $76.85, while crude for March 2007 hit $80 a barrel.
London Brent settled $2.30 higher at $76.69 after reaching a record $76.95.
In Nigeria, two suspected explosions at a crude pipeline operated by Agip, a unit of Italy's Eni, caused oil spills, Nigerian officials said.
Eni denied reports of sabotage and extensive oil spills and said damage would be repaired soon. Royal Dutch Shell Plc has already had to shut down 473,000 barrels per day of Nigerian supply, almost a quarter of output in Africa's top oil supplier, due to attacks by rebels.
Adding to Middle East tension, Israel blockaded Lebanese ports and struck Beirut airport today, expanding reprisals that have killed 55 civilians in Lebanon since Hizbollah guerrillas captured two Israeli soldiers a day earlier.
Later today, the Israeli army said a rocket fired by Hizbollah hit Israel's third-largest city, Haifa.
Israel's ambassador to the United States called the attack a "major, major escalation" but a Hizbollah spokesman denied the group was responsible. Israeli naval vessels also fired on fuel tanks at Beirut's international airport, according to airport sources. Supply breaks and growing Middle East tension mean oil prices may rise further, investors say.
The Middle East pumps about a quarter of world output, although neither Israel nor Lebanon are producers. "The next stop is $80," said Mark Matthias, chief executive of investment specialist Dawnay Day Quantum. "That's what the market is looking at now."