NEW YORK (Reuters) - Oil prices rose on Friday as the escalating conflict between Israel and Palestinians reinforced worries about supply in the region while a fire hit a Gulf of Mexico energy platform.
Trading was volatile with the U.S. December crude contract headed toward expiration at the end of Friday's session, following the Brent December contract's expiry the day before.
Front-month January Brent crude briefly turned lower after the U.S. benchmark crude, also known as West Texas Intermediate (WTI), surged more than $1.50 to hit $87 a barrel, as news of the fire on the Gulf of Mexico installation affected the Brent-U.S. crude spread trading.
A fire broke out at an oil and natural gas platform in the Gulf of Mexico, the U.S. Coast Guard said. The Coast Guard told local media that the platform was not actively producing.
"Traders who had been long Brent/short WTI on the Middle East fears reversed that when the platform fire news broke," said Phil Flynn, analyst at Price Futures Group in Chicago.
Brent's premium to U.S. crude, comparing December contracts, edged above $26 a barrel on Thursday, the widest since October 2011. But the spread on Friday, now contrasting January contracts, was below $22 a barrel.
Prior to the platform fire news, the support for crude futures from Middle East turmoil and the potential for supply disruptions in the region had been tempered by concerns about the global economy and a well-supplied market.
Brent January crude rose 41 cents to $108.42 a barrel by 12:29 p.m. EST (1729 GMT), having swung from $107.66 to $109.12.
Expiring U.S. December crude traded up $1.09 at $86.54 a barrel, after touching $87.
U.S. January crude was up $1.04 at $86.91 a barrel, having swung in a range from $85.41 to $87.36.
GAZA CONFLAGRATION EYED
The risk to oil of supply from the region remained as Israel positioned tanks and troops outside Gaza and called up reservists on the third day of the offensive against the Palestinian enclave.
After Iraq's envoy to the Arab League said in Cairo it would invite Arab states to use oil as a weapon to press for a halt to Israeli attacks on Gaza, he later appeared to withdraw the remark, saying Baghdad would make no particular proposal to a League meeting.
Egypt's Prime Minister Hisham Kandil visited the Gaza Strip and a Palestinian official close to Egypt's mediators told Reuters that Kandil's visit "was the beginning of a process to explore the possibility of reaching a truce.
FISCAL CLIFF HANGER
Also on Friday, U.S. President Barack Obama met with top U.S. lawmakers to work on a deal to avert year-end automatic tax hikes and spending cuts.
A report on Friday showing Hurricane Sandy hit U.S. industrial output in October followed other indications of the storm affecting the economy, including a rise in initial jobless last week and a slump in factory activity in the mid-Atlantic region struck by Sandy.