Oil rose for a third day on Tuesday as traders kept scrutiny on Middle East crude supply amid the Israeli-Hamas conflict, but prices were still on track to end the year down 60 percent, the biggest annual loss on record. Crude jumped as much as 12 percent on Monday after Israel launched its fiercest air offensive in the Hamas-ruled Gaza strip in decades and prepared for a ground assault, raising concerns that enraged Arab crude-producing neighbors would react. By 0142 GMT, U.S. crude was up 35 cents at $40.37 a barrel, while London Brent gained 25 cents to $40.80. However, oil is still heading for a loss of nearly 60 percent this year, its biggest annual fall since futures began trading 25 years ago. "Now, matters in the Middle East seem to be taking the forefront, overriding the global economic problems," said Gerard Rigby, an analyst at Fuel First Consulting in Sydney. "I'll keep an eye on stocks and the dollar as well." Four days of Israeli bombardment have killed more than 300 Palestinians, while at least three Israelis were killed in retaliation by Islamist militants in Gaza. The conflict also weighed on the greenback, further boosting the investment appeal of dollar-denominated assets, including oil and other commodities. The euro rose 0.6 percent against the dollar from late U.S. trading on Monday to $1.4062. The dollar declined 0.4 percent against the Swiss franc to 1.0552 francs, but rose 0.2 percent against the yen to 90.71 yen. But economic worries continue to cap oil gains, with Wall Street sliding on Monday after a failed $17-billion joint venture between Kuwait and Dow Chemical threatened to unravel Dow's planned takeover of Rohm & Haas, one of the year's larger merger deals. "People are still wary of the global economic problems. There is still pessimistic news coming out of the States," Rigby said. The economic slump has hit fuel consumption worldwide, bringing crude prices down more than $100 a barrel from a peak of more than $147 touched in July. OPEC agreed its biggest-ever production cut of 2.2 million barrels per day in December to fight the market's slide. The cartel has cut output three times in an effort to remove about 5 percent of world supply. Ecuador said it will monitor oil markets after OPEC makes effective its January output cuts, to decide whether to back another emergency meeting by the oil cartel. A poll of analysts ahead of weekly U.S. government inventory data forecast U.S. crude stocks fell by 1.4 million barrels last week, while distillate inventories rose by 1 million barrels and gasoline stocks increased by 1.5 million barrels.

Source