Oil up 5 percent on global tensions, soft dollar

NEW YORK (Reuters) - Oil prices rose nearly 5 percent on Thursday, the biggest percentage gain in more than two months, driven by rising tensions between the United States and energy behemoth Russia.

Prices have rebounded more than $9 from lows earlier this week, which put a dramatic end to a slide of more than $20 since mid-July, leaving analysts mixed over whether oil's next big move is up or down.

"This is a geopolitically driven bounce," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. "But it might be premature to say that we've seen the bottom as the market's focus could revert very quickly to demand deterioration."

U.S. crude gained $5.62, or 4.86 percent, to settle at $121.18 a barrel, the biggest percentage gain since June 6. London Brent crude climbed $5.80 to $120.16.

Oil is down sharply from the record high of $147.27 a barrel reached July 11 -- a slide triggered by evidence of a global slowdown in energy demand -- but it remains up about 20 percent so far this year and about sixfold since 2002.

Thursday's gains came after Russia, the world's second-largest oil exporter, said it would respond with more than just a diplomatic protest to a U.S. deal with Poland to station parts of a U.S. missile defense shield on Polish soil.

Relations between Russia and the West had already been strained by Moscow's military intervention in Georgia, a conflict that has already disrupted the transit of Azeri oil through the region.

The U.S.-Russia spat adds to a list of other political factors that have supported oil prices in recent months, such as the dispute over Iran's nuclear program and repeated militant attacks on oil facilities in Nigeria.

Adding support to oil and other commodities markets on Thursday was weakness in the U.S. dollar, which can raise the purchasing power of buyers using other currencies.

Dealers were also eyeing the Organization of the Petroleum Exporting Countries and Saudi Arabia, its top producer, for signs they may decide to trim supply. OPEC meets on September 9 to review output policy.

"As prices drop, Saudi Arabia may cut back on its recent increase in production, which could halt the most recent price decline," the U.S. Energy Information Administration said in its weekly review of the market.

Also supporting the market was concern that Tropical Storm Fay might re-enter the Gulf of Mexico over the weekend, affecting oil refineries and offshore platforms.

International tensions and the weak dollar outweighed a U.S. government report issued Wednesday that showed crude inventories rose by 9.4 million barrels, the largest weekly increase since March 2001.

(Additional reporting by Alex Lawler in London and Seng Li Peng in Singapore; editing by Matthew Lewis)