Oil tops $78 amid fresh Iran tensions

Oil prices rose above USD 78 a barrel on Monday as heightened tension between Iran and Western nations raised speculation of a potential supply risk, encouraging investors to push prices higher.

The gains came despite a stronger US dollar that inched up on an extended short-covering bounce as investors pared risk trades. Concerns over the US recovery pace also helped to power gold to a new record above USD 1,160 an ounce.

US crude for January delivery rose 76 cents to USD 78.231 a barrel by 0213 GMT. The December contract, which expired on Friday, settled down 74 cents at USD 76.72 a barrel, weighed down by a stronger dollar and concerns about the energy demand outlook.

London Brent crude gained 79 cents to USD 77.99.

Iran's armed forces launched large-scale air defence war games on Sunday to show off the country's deterrence capabilities in the face of pressure from the West over its nuclear programme, and a cleric in the Revolutionary Guards warned that 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.

Still, analysts said oil prices were still trading within the USD 75-USD 82 band of the past one month and prices would need a lot more upside pressure to kick leap out of the USD 82 levels.

Barclays Capital said in a research note on Friday that the upside to oil prices would likely also be capped by OPEC, which has indicated that any quick run-up in prices would 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, 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.