Oil rises above $125, Nigeria supports

LONDON, July 29 (Reuters) – Oil rose above $125 a barrel on Tuesday as disruption to Nigerian output raised supply concerns, but signs of weakening U.S. demand limited gains.

Royal Dutch Shell said it was assessing the impact of an attack by militants on a Nigerian pipeline that sparked Monday's price rise. But analysts said the rally, which came in low volume, looked fragile.

"We still believe that crude's rallies are vulnerable and we would advise not buying into them," said Edward Meir, analyst at MF Global. "We are looking for an eventual retreat to $121 to $122."

U.S. crude was up 85 cents at $125.58 a barrel by 0849 GMT, after a gain of $1.47 on Monday. Brent crude was up 86 cents at $126.70.

Shell has not specified how much oil it has shut down because of Monday's attack. But industry sources said about 130,000 barrels per day of crude flows through the pipeline.

Also supporting oil were tensions over Iran's nuclear programme. Iran is the second-largest oil producer in the Organization of the Petroleum Exporting Countries.

Iranian President Mahmoud Ahmadinejad was quoted on Saturday as saying that Iran has more than 5,000 active centrifuges for enriching uranium, suggesting a rapid expansion of its nuclear work.

But Iran appears to have overstated size of the expansion, a diplomat close to the International Atomic Energy Agency said on Monday.

Oil has fallen from a record peak of $147.27 on July 11, pressured by signs that high prices and an economic slowdown are curbing demand in the United States, the world's largest oil consumer.

The Energy Information Administration said on Monday U.S. oil demand in May was 660,000 barrels per day less than previously thought. A separate government report said motorists are driving less.

Attention on Wednesday will focus on the latest snapshot of U.S. oil supplies.

Crude oil stocks probably fell by 1.4 million barrels and gasoline dropped by 100,000 barrels, analysts said in a Reuters poll. Distillates inventories are expected to rise by 1.7 million barrels.