Oil above $40 a barrel; geopolitical risk returns… Israeli air strikes go into third day… China to build up oil reserves while price is low

Oil prices rose above $40 a barrel on Monday, boosted by the weak dollar and Israeli attacks on Hamas that served as a reminder of tensions that could threaten Middle East crude oil supplies.

U.S. light, sweet crude was up $2.75 at $40.45 a barrel by 1335 GMT, below a session high of $42.20.

Oil is on track for a nearly 60 percent loss this year, the biggest annual fall since futures began trading 25 years ago.

London Brent crude rose $2.88 to $41.25 a barrel, after touching a session high of $43.18.

“Geopolitics had disappeared from the oil scene for the last couple of months but will regain some price premium with the latest Israeli attack in Gaza,” Olivier Jakob, of consultants Petromatrix, said in a research note.

Israeli aircraft attacked Hamas targets in Gaza on the third day of an offensive that has killed more than 300 Palestinians, many of them civilians.

The attacks enraged Arabs across the Middle East and highlighted the risk, however remote, that the conflict could threaten oil supplies from the region.

Gold rose nearly 3 percent to its highest since early October on the weak dollar and the Middle East violence.

The dollar fell broadly, pressured by the gloomy outlook for the U.S. economy.

“The level and intensity of violence this time has warranted a fiercer response from the broader Arab world and beyond,” said Raja Kiwan of energy consultants PFC Energy.

Kiwan said, however, that the amount of bearish economic news would ultimately overshadow such geopolitical factors.

OPEC COMPLIANCE

Oil is down more than $100 a barrel from a record peak of more than $147 in July, depressed by the downturn in the world economy, which has hit demand for fuel.

Prices had broken a nine-session losing streak on Friday partly on evidence of OPEC compliance with its biggest ever production cut agreed earlier in December to try to halt the market’s slide.

Libya has told oil firms to curb output by 270,000 barrels per day from Jan. 1, more than the reduction it needs to make under OPEC’s agreement to cut output.

The Abu Dhabi National Oil Co, the UAE’s main producer, said it would cut January and February oil exports by much more than some refiners had expected.

The allocations were among the first concrete examples that OPEC exporters were implementing the Organization of the Petroleum Exporting Countries’ Dec. 17 deal to cut supplies by 2.2 million barrels per day.

Saudi Arabia, the world’s largest exporter, had informed its customers of cuts even before the meeting.

OPEC has cut output three times in an effort to remove about 5 percent of world supply to halt the slump.

China’s energy chief said the world’s second-largest oil user after the United States would take advantage of falling oil prices to boost imports and build up its fledgling oil reserves.

Jane Merriman LONDON, Dec 29 (Reuters)