The price of oil rose as the bombing of the Gaza Strip entered its sixth day and Israelís prime minister warned of a possible ground offensive.
Brent, the benchmark for oil traded internationally, shot up by 1.7 per cent to 110.84 a barrel. Oil on the New York Mercantile Exchange also rose by around 1.7 per cent to 88.38 a barrel.
The Israel Defence Force (IDF) continued to bomb targets in the Gaza Strip on Monday, leading to further deaths.
The IDF is prepared to ďsignificantly widen the operation,Ē Benjamin Netanyahu, the prime minister of Israel, said on Sunday, increasing fears that a prolonged conflict will interrupt crude supplies from the Middle East.
The conflict flared up after Israel killed Ahmed al-Jaabari, the Hamas leader, in a targeted strike last Wednesday, leading to an escalation of missile attacks on Israeli territory and the bombing of the Gaza Strip by the IDF.
Analysts say that violence in the occupied territories is unlikely to directly spill over into the oil producing countries of the region. But the spectre of a further escalation of the armed conflict feeds into the wider narrative of geopolitical tension in the Gulf, which has centred around Iranís nuclear programme.
ďItís coming at a time that is crucial for the geopolitics of the Middle East,Ē said Amrita Sen, the chief oil analyst at Energy Aspects.
Last week, a leaked report by the International Atomic Energy Agency (IAEA) claimed that Iran is able to double the amount of centrifuges at a uranium enrichment facility, and increase the production of enriched uranium from 15 to 25kg. All of the 3,000 centrifuges at the Fordo site in northwestern Iran could be installed within months, said the IAEA.
This development will be viewed with concern by Western powers, who slapped a fourth round of sanctions on Iran at the beginning of the year, and by Israel, who has threatened to bomb Iranís nuclear sites.
Israelís suspicions that Iran is supplying Hamas with missiles add to the danger of air strikes against the Islamic Republic, which has the potential to lead to military conflict in the Gulf.
Crude prices also rose on optimism that Barack Obama, the American president, and the Republican House majority leader John Boehner would reach an agreement to avoid the so-called fiscal cliff, a combination of tax rises and budget cuts that would likely tip the United States back into -recession.
ďThe focus is more on the US at the moment,Ē said Ms Sen.
The oil price rallied in spite of data by the Joint Oil Data Initiative (Jodi) on Sunday that indicated that Saudi Arabia, Opecís largest producer, had increased exports in September to 7.28m barrels per day (bpd) as domestic refiners slashed their output.