Oil slipped from record highs on Monday in volatile trading as fighting raged between Israel and Lebanese Hizbollah guerrillas.
Concern that the conflict could escalate and spread to Middle East oil producers had earlier sent London Brent crude to a record high.
London Brent for September was down 46 cents at $77.12 a barrel by 1359 GMT, after earlier touching a record $78.18 a barrel.
U.S. light crude was down 46 cents at $76.57 a barrel, over $2 below the high of $78.40 hit on Friday.
Both markets fell sharply after Israel's Channel 10 television cited a senior military official stating that Israel could end its Lebanon offensive within days. The Israeli government quickly denied the report, but it was enough to prompt a round of profit-taking after a four-day rally on oil.
"Given the importance of geopolitics to the market at the moment, prices will see-saw with the news flow," said Eoin O'Callaghan, economist at BNP Paribas.
"There has been so much geopolitical news in so short a time that you are going to get large fluctuations in prices as the news flow changes."
Israeli aircraft blasted Lebanon on Monday after Hizbollah rockets struck deeper than ever into Israel, with no diplomatic initiative in sight to end the fighting.
Neither Israel nor Lebanon are oil producers, but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output.
REGIONAL HUE
The conflict threatens to suck in Hizbollah's Syrian and Iranian allies, and to compound the conflict between the West and Iran over Tehran's nuclear programme.
"The crisis has quickly taken on a regional hue, with both Washington and Tel Aviv accusing Iran and Syria of orchestrating the attacks," said Washington-based energy consultants PFC in a report.
"As a result, U.S. policy toward Tehran is likely to harden even further, and could undermine already fraught efforts to resolve the Iranian uranium enrichment issue diplomatically."
The world's fourth largest oil exporter insists it is enriching uranium for electricity generation, but the United States fears that could be a front for bomb-making activities.
On Sunday, Iran condemned a decision to return its nuclear file to the U.N. Security Council after it delayed accepting incentives aimed at stopping it from developing nuclear weapons.
In Iraq, scrambling to restore its oil exports to pre-war levels, the head of the country's North Oil Company was kidnapped in the capital, the second high-profile abduction in two days.
Analysts saw no let-up in prices in the near term.
"We would expect front-month prices to rise above $80 this quarter," said O'Callaghan.
"There is plenty to keep prices inflated. On the one hand geopolitics, and on the other fundamentals are tight. And we also have the possibility of hurricanes."
OPEC said on Friday that high prices and slower economic expansion would moderate global oil demand growth next year.
OPEC economists forecast oil demand would rise by 1.3 million barrels per day (bpd) down from 1.4 million bpd in 2006.
The producer group expects the need for its oil to fall next year as more projects from rival suppliers come on line, allowing OPEC to rebuild its spare capacity.
Analysts have expressed concerns about the effects of high energy prices on global economic growth. But U.S. Energy Secretary Sam Bodman said on Friday the economy of the world's top energy consumer has held up against rising fuel costs.
Concern that the conflict could escalate and spread to Middle East oil producers had earlier sent London Brent crude to a record high.
London Brent for September was down 46 cents at $77.12 a barrel by 1359 GMT, after earlier touching a record $78.18 a barrel.
U.S. light crude was down 46 cents at $76.57 a barrel, over $2 below the high of $78.40 hit on Friday.
Both markets fell sharply after Israel's Channel 10 television cited a senior military official stating that Israel could end its Lebanon offensive within days. The Israeli government quickly denied the report, but it was enough to prompt a round of profit-taking after a four-day rally on oil.
"Given the importance of geopolitics to the market at the moment, prices will see-saw with the news flow," said Eoin O'Callaghan, economist at BNP Paribas.
"There has been so much geopolitical news in so short a time that you are going to get large fluctuations in prices as the news flow changes."
Israeli aircraft blasted Lebanon on Monday after Hizbollah rockets struck deeper than ever into Israel, with no diplomatic initiative in sight to end the fighting.
Neither Israel nor Lebanon are oil producers, but both lie at the heart of the Middle East, which collectively pumps nearly a third of global output.
REGIONAL HUE
The conflict threatens to suck in Hizbollah's Syrian and Iranian allies, and to compound the conflict between the West and Iran over Tehran's nuclear programme.
"The crisis has quickly taken on a regional hue, with both Washington and Tel Aviv accusing Iran and Syria of orchestrating the attacks," said Washington-based energy consultants PFC in a report.
"As a result, U.S. policy toward Tehran is likely to harden even further, and could undermine already fraught efforts to resolve the Iranian uranium enrichment issue diplomatically."
The world's fourth largest oil exporter insists it is enriching uranium for electricity generation, but the United States fears that could be a front for bomb-making activities.
On Sunday, Iran condemned a decision to return its nuclear file to the U.N. Security Council after it delayed accepting incentives aimed at stopping it from developing nuclear weapons.
In Iraq, scrambling to restore its oil exports to pre-war levels, the head of the country's North Oil Company was kidnapped in the capital, the second high-profile abduction in two days.
Analysts saw no let-up in prices in the near term.
"We would expect front-month prices to rise above $80 this quarter," said O'Callaghan.
"There is plenty to keep prices inflated. On the one hand geopolitics, and on the other fundamentals are tight. And we also have the possibility of hurricanes."
OPEC said on Friday that high prices and slower economic expansion would moderate global oil demand growth next year.
OPEC economists forecast oil demand would rise by 1.3 million barrels per day (bpd) down from 1.4 million bpd in 2006.
The producer group expects the need for its oil to fall next year as more projects from rival suppliers come on line, allowing OPEC to rebuild its spare capacity.
Analysts have expressed concerns about the effects of high energy prices on global economic growth. But U.S. Energy Secretary Sam Bodman said on Friday the economy of the world's top energy consumer has held up against rising fuel costs.
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