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Oil prices rise after aircraft downed

Friday, July 18 13:38:23

Brent crude oil climbed above $108 a barrel today, extending sharp gains on heightened geopolitical risk after the downing of a Malaysian jetliner over eastern Ukraine and as Israeli ground troops advanced into Gaza.

News of the crash of the Malaysian plane came a day after the United States imposed sanctions on Russia's biggest firms after what Washington sees as Moscow's failure to curb violence in Ukraine.

Oil prices on both sides of the Atlantic surged about 2 percent on Thursday, partly reversing three weeks of falls.

Brent climbed 28 cents to $108.17 a barrel by 1140 GMT after rising 72 cents in the previous session. U.S. crude rose 15 cents to $103.35 after closing $1.99 higher.

Both crudes were on track for their first weekly gains in a month.

"After yesterday's Ukrainian event and the prolonged Middle East tension, one cannot help but think that the month-long downtrend which started in the middle of June is over and the perfect oil bull cocktail is being mixed," said Tamas Varga, oil analyst at London brokerage PVM Oil Associates.

Russia is one of the world's top producers and exporters of oil and gas. Any restriction on the supply of Russian fuel to the West would be likely to support oil prices.

Washington imposed sanctions this week on a raft of Russian companies including Rosneft, Russia's top oil producer. U.S. President Barack Obama warned Russian President Vladimir Putin on Thursday of additional sanctions if Moscow did not change course on Ukraine.

"If Russia turns out to have played any part in yesterday's shooting down of a passenger plane over east Ukraine, there is a risk of sanctions being further tightened," said Eugene Weinberg, analyst at Commerzbank in Frankfurt.

"In this case, it would not only be gas prices in Europe that would react, but also the prices of oil, nickel, copper, aluminum, wheat and palladium. After all, Russia is one of the world's biggest producers and exporters of these commodities."

Escalating tension in the Middle East also ratcheted up the global risk premium as Israel intensified its ground offensive in Gaza, pounding targets with artillery fire and using tanks and infantry to battle Hamas fighters.

More than 250 Palestinians, most of them civilians, have been killed since the fighting began on July 8.

Although Gaza is a long way from the oilfields of the Middle East Gulf, investors worry that a general conflagration could draw in neighboring countries and affect oil supplies.

Brent and U.S. crude were also supported by data from the United States and China indicating improving demand in the world's top two oil consumers.

Data from China indicated slightly stronger-than-expected second-quarter growth of 7.5 percent and higher oil demand, while a report from the United States showed a larger-than-expected draw in crude stocks of 7.5 million barrels last week.

"The turnaround in risk sentiment after a downgrading of the geopolitical risk premium over the past couple of weeks should see prices push higher from here," ANZ said in a note. (Reuters)

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