Oil Rises on Threat of Tropical Storm

Oil rose Friday as a tropical weather system brewing in the Caribbean threatened to sweep through the Gulf of Mexico next week and menace oil rigs yet to fully recover from last year's hurricanes.

Support also came from Iran's nuclear row with the West that could prompt United Nations sanctions against the world's fourth-largest oil exporter, although Russia ruled out such punitive action for now.

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U.S. crude settled 15 cents higher at $72.51 a barrel, after hitting $73.75 earlier in the day, and gaining 60 cents Thursday. London Brent rose 2 cents to $72.70.

A spinning band of squalls in the Caribbean was on the verge of becoming Tropical Storm Ernesto and was expected to head northwest toward the Gulf of Mexico by the middle of next week.

"Everybody came in and saw the story about the potential of this storm," said Kevin Blemkin, a broker at Man Financial. "People get a little bit excited about these things and we go from strength to strength."

A year ago hurricane Katrina hit the Gulf and temporarily shut in a quarter of U.S. oil production.

"After last year, with Katrina and the like, you'd expect people to be a bit nervous," said Tony Dolphin, director of economics and strategy at Henderson Global Investors, which manages more than 67 billion pounds ($127 billion).

Oil major BP said it could start removing nonessential workers from the Gulf of Mexico on Friday, but that output would not be affected by any evacuations.

A surge in demand in China, the world's second biggest fuel burner, also underpinned oil's rise.

Demand in China rose 12.2 percent in July from a year earlier, Reuters calculations showed on Friday, a fourth month of double-digit expansion fueled by a hot summer and a booming car industry.

U.S. crude since the start of the year is up about 20 percent after a prolonged supply outage from Nigeria and fears that Iran will withhold exports in retaliation to U.N. sanctions.

The five permanent members of the Security Council — the United States, France, Britain, China and Russia — along with Germany, have threatened sanctions against Iran if it does not suspend uranium enrichment by Aug. 31.

They offered Tehran a package of incentives for giving up its atomic work. Iran this week proposed talks on its nuclear programme, but its response has not fully satisfied the United States, Germany and France.

Moscow on Friday ruled out any discussion now of sanctions against Iran, saying these had proved ineffective in the past and there was still room for diplomacy.

In addition, the European Union's foreign policy chief Javier Solana said he expected new talks with Iran's chief nuclear negotiator Ali Larijani on moving the process forward.

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