Oil above $40 after Gaza attacks

Investors concerned conflict could spread and disrupt Middle East supply.

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By Kenneth Musante, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices rose above $40 a barrel Monday as investors took a more subdued look at Middle East production in the wake of Israeli airstrikes against the Gaza Strip.

U.S. crude for February delivery rose $2.31 to settle at $40.02 a barrel after soaring as high as $42.20 earlier in the day.

Oil has risen $4.67, or 13.2%, in the last two trading sessions. Crude prices rose $2.36 Friday after OPEC member United Arab Emirates detailed its production-cutting plans.

Some analysts worry that the Gaza conflict could widen, disrupting production in the oil-rich Middle East region. Israeli troop movements have indicated a possible ground assault.

Several Arab leaders have reportedly condemned the attacks, and Syria abandoned peace negotiations with the Jewish state.

"That's always in the background as far as traders are concerned," said Jim Ritterbusch, president of oil trading advisory firm Ritterbusch and Associates.

However, the current fighting does not affect any crude supplies, and the risk of Middle East supply disruption remains relatively low, according to Michael Davies, head of research with Sucden Financial.

"Because of the thin trading conditions, (oil is) gaining more ground than it probably (should've) done," said Davies.

Due to the holiday season, trading has been relatively thin since last week. Trading was closed last Thursday for Christmas, and will be closed again this Thursday, New Year's Day. When there are fewer trades being made, price fluctuations tend to be more volatile.

Oil prices have fallen more than $100 a barrel since hitting a record high of $147.27 in July. Prices could end the year down 60%, the biggest percentage drop on record, as investors have worried about falling demand for fuel due to the global economic slowdown.

Prices have fallen more than $8 a barrel since the beginning of the month, and hit a 4-year low of $32.40 a barrel on Dec. 19.

China: Prices also rose as China said it would take advantage of the current discount to expand its strategic reserves.

A Chinese official urged businesses to use their spare oil storage capacity to contribute to the reserves Monday, according to reports.

However any rise in oil prices due to China's announcement are "short term," said Davies.

Any lasting turnaround in oil prices needs to be predicated by the stabilization of the Chinese economy, he said.

Unless that happens, "we have to realize that their demand for oil is not going to be as high as everyone expected," said Davies.

OPEC cuts: As 2009 approaches, investors will be looking to see what actions the Organization of Petroleum Exporting Countries will take.

Earlier this month, the group, whose members produce about 40% of the world's oil, said it would cut production by 2.2 million barrels a day starting in January in order to bolster prices.

There has been concern that group members may be reluctant to hold to pledged production cuts, since oil prices have fallen so far since July.

The group had previously pledged in October to cut production by 1.5 million barrels a day, but by November had only reduced output by about 950,000 barrels a day, according to estimates from research firm Platts.

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