Oil rose above $76 a barrel today as conflict between Israel and Hizbollah raised concern the violence could spread in the Middle East, source of almost a third of the world's oil.
Israeli warplanes battered Lebanon today, killing 26 people, and more Hizbollah rockets hit the Israeli city of Haifa, with no sign that diplomacy would halt the week-old conflict soon.
"It's a very serious situation and the potential for it to spread is still there," said Kevin Norrish, oil analyst at Barclays Capital.
"The risk is that prices will move higher, and certainly not fall very far." US light sweet crude rose 80 cents to $76.10 a barrel by lunchtime. London Brent crude gained 98 cents to $76.10 a barrel.
Oil in New York hit a record high of $78.40 on Friday and is up 24 per cent this year because of the Middle East fighting, the row over Iran's nuclear programme and a flow of investor money into commodities.
Traders fear the violence, triggered when Hizbollah seized two Israeli soldiers and killed eight on July 12th, could engulf major regional crude oil producers.
"The market's biggest fear is that Iran, a financial backer of Hizbollah and OPEC's number two supplier, could be drawn into the conflict," said Andrew Harrington from ANZ Bank.
The conflict threatens to suck in Hizbollah's Syrian and Iranian allies and to inflame the nuclear row between the West and Iran, keeping the heat under prices, analysts say. "You still have a very real possibility that Syria gets involved and Iran gets involved," said Mike Wittner, an oil analyst at investment bank Calyon.
"The risk of events, from Israel-Lebanon to Iran's nuclear issue to Iraq, in the short term lies to the upside."
Iran funded and supplied Hizbollah during the 1980s but denies providing weapons in the latest round of violence. Syria's crude exports continued without disruption on Tuesday, an official at state oil company Sytrol said. Sytrol exports around 6 million barrels of crude oil a month.
As well as threats to supplies, rising demand in the United States, the world's largest oil consumer, and strong economic growth in China are also supporting oil prices. Gasoline inventories in the United States, where the peak demand driving season is in full swing, were predicted in a Reuters survey to have fallen by 800,000 barrels last week.