Oil rises on Iran, Nigeria supply worries

NEW YORK (Reuters) - Oil rose to $137 a barrel on Tuesday on concerns over Nigerian supply disruptions and rising tensions between Israel and OPEC member Iran.

U.S. crude settled up 26 cents at $137.00 a barrel after trading as high as $138.75. London Brent crude gained 55 cents to settle at $136.46 a barrel.

Oil prices rose early on rumors of an attack on Iran's nuclear sites amid rising tensions with Israel over Tehran's nuclear program. A senior Iranian official later denied any attack had occurred and an Israeli army spokesman said they were not aware of any incident, helping calm financial markets and eroding oil's early gains.

Analysts are worried heightened tensions between Iran and the West could threaten the Straits of Hormuz, a narrow waterway separating Iran from the Arabian Peninsula through which roughly 40 percent of the world's traded oil flows.

Further support came from the weaker dollar and concerns about supplies from Nigeria.

"The dollar weakness gave us a push this morning," said Tom Bentz of BNP Paribas Commodity Futures Inc. in New York.

"The market is concerned about the missing Nigerian crude supply and obviously the tensions between Iran and Israel."

Investors have rushed into crude and other commodities this year as a hedge against the falling greenback and inflation, helping to push oil to a record near $140 a barrel last week.

Markets are eyeing the dollar ahead of the U.S. Federal Reserve's interest rate decision on Wednesday. Fed policy makers are expected to leave rates unchanged.

Nigeria's senior oil workers union began a limited strike at Chevron offices on Monday. The stoppage has not hit production, but has added to concerns about further disruptions in the OPEC nation, where militant attacks shut 340,000 barrels per day (bpd) of production last week.

Royal Dutch Shell (RDSa.L) on Tuesday said it had restarted production at its 220,000 bpd Bonga offshore oilfield in Nigeria after an attack by militants last week.

United Nations official Ibrahim Gambari will seek a 90-day truce with militants that have attacked oil facilities in the oil-producing Niger Delta.

The disruptions have added to bullish sentiment that has boosted prices 40 percent this year, extending a six-year rally in oil as production struggles to keep up with surging demand from emerging economies like China.

Oil cartel OPEC insists supplies are ample and blames the rise on speculators. Still, top exporter Saudi Arabia announced over the weekend at a meeting between producers and consumers it would hike output in an attempt to cool markets.

Kuwait, another one of the few OPEC members with spare capacity, plans to increase its oil output by 300,000 barrels per day starting mid-2009, state news agency KUNA reported.

Rising fuel costs have hurt the economies of consuming nations and sparked protests around the globe.

The market also is awaiting U.S. weekly oil inventory data due on Wednesday. A Reuters poll of analysts forecast a 1.4 million barrel draw in crude inventories, a 200,000 barrel build in gasoline stocks, and a 1.9 million barrel rise in distillates.

(Reporting by Matthew Robinson, Robert Gibbons, Gene Ramos in New York, Jane Merriman in London; Editing by David Gregorio)