Oil rises to near $40 as Israeli attacks on Gaza roil middle east

Light, sweet crude for February delivery rose $1.99 to $39.70 a barrel in electronic trading on the New York Mercantile Exchange by late afternoon in Singapore. The contract on Friday rose $2.36 to settle at $37.71.

Oil traders were startled by the eruption of fighting over the weekend, as Israeli warplanes pounded the Gaza Strip in response to intensifying rocket and mortar fire from the Islamist Hamas group, which ended a six-month ceasefire a week ago.

Israel prepared for a possible invasion after killing 307 Palestinians in three days of air raids, with Saturday's attacks among the bloodiest days in 60 years of conflict.

Arab leaders protested the attacks and Syria broke off indirect peace talks with the Jewish state.

For the moment, there seemed little risk of the violence engulfing the region's big oil suppliers, or even provoking more saber-rattling support beyond Iran, which was quick to call for a sterner response from Arab governments.

"There could be fear that an escalating Middle East conflict could disrupt supplies, though I don't see that happening at this point," AP quoted Gerard Rigby, energy analyst with Fuel First Consulting in Sydney as saying.

"(Israel-Palestinian conflict) always causes a bit of a blip and is one component that could support prices short-term."

Oil had jumped 6.7 percent to $37.71 on Dec. 26, the biggest gain in two weeks for a contract closest to expiration. Prices rose as OPEC member-states cut output to prevent a glut and Israel threatened to retaliate for a string of rocket attacks since a six-month truce with Hamas collapsed on Dec. 19.

Oil prices have fallen 73 percent since peaking at $147.27 a barrel on July 11 as a credit crisis in the U.S. sparked a steep drop-off in consumer demand and corporate earnings. Analysts expect more dismal economic news from the fourth quarter over the next few weeks.