Picture: REUTERS
Picture: REUTERS

LONDON — Brent crude oil rose more than $1 a barrel on Wednesday after an explosion on a Tel Aviv bus intensified concern that the clashes between Gaza and Israel could lead to a wider regional conflict that would disrupt oil flows.

An explosion hit a bus in the heart of Tel Aviv on Wednesday, wounding at least 10 people in what officials said was a terrorist attack.

This dented mounting hope that a cease-fire may be brokered in coming days.

Israeli air strikes shook the Gaza Strip and Palestinian rockets struck across the border as US Secretary of State Hillary Clinton held talks in Jerusalem in the early hours of Wednesday.

Brent crude futures were up $1.07 at $110.90 a barrel by 10.44am GMT, off an earlier session-high of $111.08. US crude rose 71c to $87.46.

If there is any progress on a truce, there could be a fairly sizeable retreat in oil, said Thorbjorn Bak Jensen, an analyst at A/S Global Risk Management in Middelfart, Denmark.

"If there is a cease-fire, prices will come down again. Most of the increase we’ve had the past week or so has been on speculation of what will happen in the Middle East," he said.

Although little oil is produced in Israel or neighbouring Egypt, fear that major oil-producing Arab nations could become involved in the conflict have aroused concern that supplies from the Gulf can be disrupted.

Gains were capped as fear for the demand outlook returned to the fore after eurozone finance ministers ended a meeting in Brussels on Wednesday without agreement on the next tranche of loans to Greece.

Concern about the US economy also weighed on prices, as Federal Reserve chairman Ben Bernanke warned that failure to resolve a budget crisis could lead to recession in the world’s biggest oil consumer.

Prices are likely to move fairly rapidly as the course of the Gaza conflict unfolds, said Jeremy Friesen, commodity strategist at Société Générale in Hong Kong.

"We’re going to see some crazy volatility in the market with rising geopolitics and rising economic uncertainty. The Middle East tensions could continue to give prices some life in the near term but we suspect that bearish economic factors will be dominant."

Geopolitics, inventories

Adding to geopolitical risks, the US on Tuesday blocked a UN Security Council statement condemning the escalating conflict between Israel and the Palestinians in the Gaza Strip, setting the scene for a possible showdown between Washington and Russia on the issue.

Investors will watch US inventory data from the Energy Information Administration at 3.30pm GMT for more clues on the outlook for supply.

Crude oil and petrol inventories were forecast to have increased last week while distillate stockpiles were seen down on higher heating oil demand.

US crude oil inventories tumbled last week due to a drop in imports, data from the American Petroleum Institute released on Tuesday showed.

Total US crude stocks fell by more than 1.9-million barrels in the week to November 16, after analysts polled by Reuters had forecast a build of 900,000 barrels.