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Mon 5 Jan 2009 06:39 AM

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Oil price reverses earlier gains

UPDATE 1: Price falls towards $46 on Israel incursion into Gaza following 25% rise since early Dec.

Oil reversed early gains on Monday to fall towards $46 a barrel as investors booked profits following crude's 25 percent rise since late December on Israel's incursion into Gaza and the Russian gas dispute.US crude for February delivery fell 33 cents to $46.01 a barrel by 5.10pm UAE time, having hit an early high of $48.68 a barrel on Monday - the highest since December 15.

London Brent was down 26 cents at $46.65 a barrel.

Oil prices have risen sharply from around $35 a barrel since Israel launched its Gaza offensive on Dec. 27, heightening geopolitical fears in the Middle East.

An Iranian military commander called for Islamic producers to cut supplies to Israel's supporters in Europe and the United States, the official IRNA news agency reported on Sunday.

However an OPEC source told Reuters that the Iranian comments would not sway other members of the Organization of the Petroleum Exporting Countries.

"There are no plans to do this and I think it is very unlikely," the OPEC source told Reuters on Monday.

OPEC's most influential member Saudi Arabia and neighbours Kuwait, the United Arab Emirates and Qatar are regional allies to the United States.

Analysts said, however, heightened tensions in the Middle East - origin of a third of the world's crude - would remain supportive of oil prices.

"Sabre rattling by Iran and further instability in the Middle East always produces fears for oil supplies, which is putting a platform under prices," said Bank of Ireland analyst Paul Harris.

The Gaza violence does not directly threaten any oil production, but traders said there was underlying concern it could affect other countries in the Middle East, with little sign of the violence abating.

Mounting evidence of OPEC's compliance with production cuts, and the U.S. Energy Department's decision to start rebuilding its crude reserves have also helped oil to support oil prices in recent days.

Adding to geopolitical concerns, Russian natural gas supplies to southeast Europe have been reduced as a result of Russia's stand-off with Ukraine over gas prices, which began on New Year's day. The two sides blame each other for the dispute.

European energy firms, which receive about a fifth of their gas via pipelines through Ukraine, said they had enough gas stockpiled to maintain supplies for several days, but analysts said Europe could face problems if the row dragged on.

The row, which recalls a similar dispute three years ago that also disrupted supplies, is likely to raise new questions in Europe about Russia's reliability as a gas supplier.

The market will also be looking for further signs of OPEC production cuts, after Libya and Abu Dhabi's National Oil Co both joined leading producer Saudi Arabia, vowing to cut output by January as OPEC trys to stem the $100 a barrel drop in oil prices since July 2008.

Senior OPEC officials have suggested the producer group could meet in mid-January or February to review the oil market's performance after announcing steep production cuts last month, although an OPEC source told Reuters on Monday that was unlikely. (Reuters)

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