Oil jumps, but Israel-Hamas little cause for alarm

By Jonathan Leff

SINGAPORE (Reuters) - A 6 percent jump in oil prices on Monday after one of the worst days of Israeli-Palestinian violence in decades underscored the market's sensitivity to conflict in a region that produces a third of global crude, but traders saw little to suggest any real impact on supplies.

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.

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.

For some, it seemed similar to the war in Lebanon in the summer of 2006, which caused a brief spike in oil prices but ended a month later without disrupting a drop of crude.

"The only danger regarding energy production is the conflict escalating to involve neighboring countries, which does not look likely at this juncture," said Jonathan Kornafel, Asia Director of Hudson Capital Energy, a U.S.-based options house.

"The reaction from traders is one of locking in gains from short positions during a week of very thin trading. The current situation does not dictate a continued rise in prices."

U.S. light, sweet crude surged earlier by more than $2, but gains seeped away by midday, leaving oil up 91 cents or 2.4 percent at $38.62 a barrel by 0616 GMT. Prices had jumped on Friday on signs last week that some of OPEC's top producers were implementing the group's biggest-ever output cut.

Gold prices rose nearly 2 percent as well on the back of the conflict and behind oil's gains.

IRAN STEPS UP RHETORIC

The offensive enraged Arabs across the Middle East, but provoked measured responses from the region's major producers.

"We hope there will be reasonable voices from the international community to pressure Israel to stop its brutal aggression," said Sheikh Abdullah bin Zayed al-Nahayan, foreign minister of the UAE, the world's sixth-largest producer.

However, the Supreme Leader of OPEC-member Iran -- which has occasionally alluded to the possibility of cutting off oil supplies in its dispute with the West over its nuclear program -- issued a religious decree ordering Muslims around the world to defend Palestinians in Gaza against Israeli attacks.

Ayatollah Ali Khamenei, Iran's most powerful authority, also criticized some Arab governments for their lack of response and urged Muslim countries to punish Israeli leaders, comments that could be seen as a prelude to calling for action on oil supplies.

"The even greater catastrophe is the encouraging silence of some Arab governments who claim to be Islamic," he said.