Oil rose by more than $6 a barrel to nearly $122 on Thursday, climbing for a third day, as Washington's missile shield deal with Poland angered Russia, adding to international tension.
The spat adds to political factors that have supported oil prices in recent months, such as the dispute over Iran's nuclear work. A weaker dollar also boosted the appeal of commodities as an inflation hedge.
"There's a myriad of geopolitical factors rumbling in the background — Russia, Iran," said Tony Machacek, broker at Bache Commodities Ltd. "Also, the dollar is weaker."
U.S. crude gained $6 to $121.48 a barrel by 1700 GMT while Brent crude climbed $5.9 to $120.30.
The United States and Poland signed a deal on Wednesday to station parts of a U.S. missile defence shield on Polish soil, drawing a sharp response from Russia, the world's second-largest oil exporter.
The pact comes as relations between Russia and the West have been strained by Moscow's military intervention in Georgia. The conflict there has disrupted the transit of Azeri oil through Georgia.
International tension outweighed a U.S. government report that on Wednesday showed crude inventories rose by 9.4 million barrels, the largest weekly increase since March 2001.
Oil has fallen from a record high of $147.27 a barrel reached last month on evidence that demand is slowing. Prices remain up about 15 percent so far this year and have climbed from below $20 in early 2002.
Also supporting the market was concern that Tropical Storm Fay might re-enter the Gulf of Mexico and expectations that the Organization of the Petroleum Exporting Countries and Saudi Arabia, its top producer, may decide to trim supply in a bid to stem a further price fall.
Saudi Arabia boosted oil output in July to 9.7 million barrels a day from 9.45 million bpd in June, far above the country's informal OPEC target. OPEC meets on Sept. 9 to review output policy.
"As prices drop, Saudi Arabia may cut back on its recent increase in production, which could halt the most recent price decline," the U.S. Energy Information Administration said in its weekly review of the market.
