Oil above $106 as Syrian conflict intensifies

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Brent crude oil rose above $106 per barrel on Monday as a superpower standoff over the Syrian civil war intensified, raising the risk of conflict spilling into the Middle East oil producing region.

But worries over bulging inventories and soft global demand forecasts offset supply concerns.

The election on Friday of a moderate as Iranian president also tempered market worries.

Investors waited to see if Iran's Hassan Rohani, who defeated hardline rivals in Iran's presidential election, would help resolve a dispute with the United States over Tehran's nuclear ambitions that has led to Western sanctions squeezing its oil exports.

Brent crude oil futures for August rose 35 cents to $106.28 per barrel by 1050 GMT, while U.S. oil gained 65 cents to $98.50.

"Oil is currently being driven primarily by geopolitics," said Commerzbank senior oil analyst Carsten Fritsch.

"The decision of the United States to supply arms to the rebels in Syria threatens finally to turn the civil war in Syria into a proxy war between the world powers, given that Russia is providing military support to the Assad regime."

Jefferies Bache oil analysts agreed: "The possibility of unrest spreading into larger oil producing regions such as Saudi Arabia and Iraq is spurring much of the injection of security risk premium," they said in a note.

Brent hit a two-month high on Friday at above $106, while U.S. light crude reached its highest level since September as investors kept a wary eye on the Syrian conflict.

Investors were cautious ahead of a U.S. Federal Reserve policy committee meeting starting on Tuesday. Chairman Ben Bernanke may provide more clarity on how and when the central bank will scale down its stimulus programme.

"The retreat in the U.S. dollar leading into the Fed meeting has given oil traders some impetus to push through resistance levels," said Ric Spooner, chief market analyst at CMC Markets.

Brent faces a zone of technical resistance around $106.50-$106.70, Spooner said.

"As you can clearly see fundamentals are not supportive of the jump on Friday, the market will now need to see a catalyst like a supply disruption as a result of Middle East tensions, or a further weakening of the dollar for whatever reason," he said.

Reuters market analyst Wang Tao said U.S oil is slated to retreat to $97.04 a barrel, while Brent is to remain in a neutral range of $105.34-$106.68 a barrel.

Syria will be a key talking point between U.S. President Barack Obama and Russia's Vladimir Putin on Monday, as both seek to find common ground in bringing Bashar al-Assad to the negotiating table to end a two-year civil war.

Late last week, Washington angered the Kremlin by authorising U.S. military support for the Syrian rebels opposed to Assad. Russian President Vladimir Putin called Assad's foes flesh-eating cannibals.

Syria is not key to global oil supply, but investors are worried the civil war there could drag into other countries and plunge the whole region into conflict. (Additional reporting by Luke Pachymuthu in Singapore; Editing by Jeff Coelho)



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