* Oil touches session high above $40 a barrel
* Israeli air strikes go into third day
* China to build up oil reserves while price is low
(Recasts, updates prices)
By Jane Merriman
LONDON, Dec 29 (Reuters) - Oil pared gains on Monday after a
rise above $40 a barrel, in response to a weak dollar and
Israeli attacks on Hamas that served as a reminder of tensions
that could threaten Middle East crude oil supplies.
U.S. light, sweet crude <CLc1> was up $1.16 at $48.87 a
barrel by 1506 GMT, below a session high of $42.20.
Oil is on track for a nearly 60 percent loss this year, the
biggest annual fall since futures began trading 25 years ago.
London Brent crude <LCOc1> rose $1.39 to $39.76 a barrel,
after touching a session high of $43.18.
"Geopolitics had disappeared from the oil scene for the last
couple of months but will regain some price premium with the
latest Israeli attack in Gaza," Olivier Jakob, of consultants
Petromatrix, said in a research note.
Israeli aircraft attacked Hamas targets in Gaza on the third
day of an offensive that has killed more than 300 Palestinians,
many of them civilians. []
The attacks enraged Arabs across the Middle East and
highlighted the risk, however remote, that the conflict could
threaten oil supplies from the region.
Gold <XAU=> initially rose nearly 3 percent to its highest
since early October on the weak dollar and the Middle East
violence.
The dollar fell broadly, pressured by the gloomy outlook for
the U.S. economy. <EUR=>
"The level and intensity of violence this time has warranted
a fiercer response from the broader Arab world and beyond," said
Raja Kiwan of energy consultants PFC Energy.
Kiwan said, however, that the amount of bearish economic
news would ultimately overshadow such geopolitical factors.
OPEC COMPLIANCE
Oil is down more than $100 a barrel from a record peak of
more than $147 in July, depressed by the downturn in the world
economy, which has hit demand for fuel.
Prices had broken a nine-session losing streak on Friday
partly on evidence of OPEC compliance with its biggest ever
production cut agreed earlier in December to try to halt the
market's slide.
Libya has told oil firms to curb output by 270,000 barrels
per day from Jan. 1, more than the reduction it needs to make
under OPEC's agreement to cut output. []
The Abu Dhabi National Oil Co, the UAE's main producer, said
it would cut January and February oil exports by much more than
some refiners had expected. []
The allocations were among the first concrete examples that
OPEC exporters were implementing the Organization of the
Petroleum Exporting Countries' Dec. 17 deal to cut supplies by
2.2 million barrels per day.
Saudi Arabia, the world's largest exporter, had informed its
customers of cuts even before the meeting.
OPEC has cut output three times in an effort to remove about
5 percent of world supply to halt the slump.
China's energy chief said the world's second-largest oil
user after the United States would take advantage of falling oil
prices to boost imports and build up its fledgling oil reserves.
[]
(Reporting by Jane Merriman in London, Luke Pachymuthu in Dubai
and Chua Baizhen and Jonathan Leff in Singapore, editing by
Anthony Barker)
