Oil rose by more than $2 a barrel to above $130 today, bringing gains in the last two days to $8 as the US dollar weakened on signals the European Central Bank may raise interest rates this year.
Comments from Israel's transport minister that an attack on Iranian nuclear sites looked "unavoidable" given the apparent failure of sanctions to deny Tehran technology with bomb-making potential also helped drive prices higher.
This was the most explicit threat yet against Iran from Prime Minister Ehud Olmert's government.
US light crude for July delivery was up $2.46 at $130.25 a barrel by 10.18am Irish time.
Oil surged $6 in after-hours trading yesterday in the US, erasing two days of sharp losses triggered by worries that high oil prices were starting to dent demand. Crude hit a record high of $135 last month.
London Brent crude rose $2.18 to $129.72 this morning.
Analysts said the dollar's weakness in the wake of comments from the ECB sparked a rush to cover oversold positions.
The remarks from the Israeli government gave added momentum to the rally, said Olivier Jakob of analysts Petromatrix. "The comments from the head of the ECB...triggered a very strong rally. Financial money is flowing back into oil and commodities," said Mr Jakob. "When the market is in such a strong rally, there is a tendency to read the bullish headlines rather than the bearish ones."
The dollar weakened further against the euro today, having fallen by more than 1 per cent yesterday after European Central Bank President Jean-Claude Trichet said a number of policymakers wanted higher interest rates and a hike was possible as soon as next month.
Gold rose today from a three-week low but investors were looking ahead to US payroll data this afternoon.
The sharp reversal in the dollar put longer-term worries about weakening oil demand on the backburner, after they were rekindled earlier this week when India and Malaysia decided to raise domestic fuel prices to cope with bulging subsidy bills.
The International Energy Agency (IEA), an adviser to 27 industrialised countries, issues its latest forecasts next week and has said it may lower its 2008 demand growth projection further, after having already more than halved it to 1.03 million barrels per day (bpd).