Oil on rise after weekend of West Asia violence

SYDNEY, July 17 (Reuters) Oil surged back toward record highs above on Monday after a weekend of worsening conflict between Israel and Hizbollah guerrillas, leaving traders nervous the violence could escalate and spread across the oil-producing West Asia.

U.S. light, sweet crude for August delivery was trading up 58 cents or 0.75 percent at .61 a barrel by 0020 GMT, climbing for a fifth day. Prices soared on Friday to a record high .40, but pared those gains by day's end.

London Brent for September the new frontmonth contract, rose 43 cents to .01 a barrel, just off Friday's record of .03.

''It's geo-politics at the fore,'' said Justin Smirk, senior economist at Westpac in Sydney. ''Israel has been the key story over the weekend, with oil investors keenly watching supply-side risk should the conflict look like expanding.'' ''Listening to noises out of Iran and Syria there is clearly a risk the violence could spread elsewhere in the region,'' he said.

Hizbollah killed eight people in the Israeli city of Haifa on Sunday in its deadliest rocket attack on the Jewish state, while Israeli planes killed 42 in Lebanon in a fifth day of strikes.

Israeli Prime Minister Ehud Olmert, who has demanded the Beirut government disarm Hizbollah, said the guerrilla group's attack would have far-reaching consequences for Lebanon, and killed nine Lebanese soldiers in air strikes on two army bases early on Monday as Hizbollah threatened more attacks.

Leaders of the world's major powers meeting in Russia urged restraint but said Israel had a right to self-defence, putting the onus on Hizbollah to stop the violence by first releasing two Israeli soldiers it captured on Wednesday.

Israel's military campaign in Lebanon, launched after Hizbollah captured the soldiers and killed eight others, has killed 152 people, all but 13 of them civilians. 24 Israelis have died in the fighting since Wednesday.

Neither Israel nor Lebanon are oil producers, but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output. Unrest is keeping oil prices, up more than 27 percent this year, near record levels.

The conflict compounds unease around the diplomatic stand-off over Iran's nuclear programme, which the world's fourth-largest oil exporter insists is for electricity generation but which the United States fears could be a front for bomb-making activities.

On Sunday, Iran condemned a decision to return its nuclear file to the U.N. Security Council after it delayed accepting incentives aimed at stopping it from developing nuclear weapons, saying it undermined the prospect of further talks with the West.

And in Iraq, scrambling to restore its oil exports to pre-war levels, a suicide bomber killed 21 people in a cafe north of Baghdad, while the head of Iraq's North Oil Company was kidnapped in the capital, the second high-profile abduction in two days.

With the brunt of the U.S. hurricane season still to come, oil futures contracts for later delivery were trading above from November 2006 to July 2007, pointing to sustained strength.

Analysts have expressed concerns about the effects of high energy prices on global economic growth. But U.S. Energy Secretary Sam Bodman said on Friday the economy of the world's top energy consumer has held up against rising fuel costs.

REUTERS DKS BD0705