Oil rises above $110 on Mideast, US budget hopes

Oil rose above $110 a barrel on Monday as escalating violence in the Middle East fuelled concerns over oil supplies from the region and as hopes rose that a US budget crisis could be averted.

Investors fear the Israeli-Palestinian conflict may draw in other countries and possibly disrupt energy exports from the region, which supplies more than a third of the world's crude.

Israel raised the stakes on Monday, saying it was ready for a ground invasion in the Gaza Strip, but preferred a diplomatic solution.

Risk analysts say it is unlikely the confrontation between Israel and Gaza will spill out into a wider conflict, but investors were wary, knowing previous Middle East wars have led to oil embargoes and temporary disruptions to energy supplies.

Brent futures was up $1.17 to trade at $110.12 by 1307 GMT. US crude oil rose $1.06 to trade at $87.98.

"Violence in the Middle East is certainly supporting oil," said Carsten Fritsch, senior commodities analyst at Commerzbank in Frankfurt. "Hopes for a solution to the crisis over the U.S. budget are also providing support for all financial markets."

United Nations Secretary General Ban Ki-moon was due to arrive in Cairo on Monday to support ceasefire efforts led by Egypt, which borders both Israel and Gaza and whose Islamist-rooted government has been hosting leaders of Hamas.

"It's a very fluid situation. As long as the fighting continues we will maintain a certain geopolitical premium in the oil prices," said Olivier Jakob, an oil analyst at Petromatrix.

Financial markets also found support from expectations that US politicians would be able to avoid a budget crisis, helping support growth in the world's biggest oil consumer.

A deal has to be agreed before January when a "fiscal cliff" - more than $600 billion in tax increases and spending cuts - will kick in and could push the U.S. economy back into recession.

Top lawmakers emerged from a meeting with President Barack Obama on Friday confident of finding common ground on taxes and spending to help them avert the disastrous situation.

"Stock markets and commodities markets are hoping a US budget deal can be found," said Commerzbank's Fritsch. "So markets are in a 'risk on' mode."

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