Oil prices rose above $79 a barrel Monday on a weakening dollar and as Iran's war games, aimed at protecting its nuclear plants, deepened tensions in the oil-rich region.
By late morning, benchmark crude for December delivery gained $2.05 to $79.52 a barrel on the New York Mercantile Exchange.
Iran on Sunday began large-scale air defense war games aimed at protecting its nuclear facilities from attack as an air force commander boasted the country could deter any military strike by Israel, state television reported.
Analysts said the military exercises sharpened tensions in the Middle East, but they didn't expect supplies to be affected.
In the U.S., the National Association of Realtors said home sales rose 10.1 percent in October. That is the highest level in more than two years and helped push crude prices higher on expectations of increased demand.
Still, crude in U.S. storage is above normal levels for this time of year and it is the dollar that been the biggest driver behind rising oil prices.
Investors holding stronger currencies can buy more dollar-based crude when the U.S. currency falls. But the refiners that turn crude into gasoline, jet fuel and diesel are cutting back because demand is so weak.
The dollar began the week lower as a Federal Reserve official urged the continuation of stimulus programs and as home sales in October greatly exceeded market expectations, revving up traders' taste for higher-yielding assets.
In morning trading in New York Monday, the 16-nation euro rose to $1.4975 from $1.4857, while the British pound jumped to $1.6613 from $1.6481.
In other Nymex trading, heating oil rose 5.5 cents to $2.03 a gallon. Gasoline for December delivery gained 5 cents to $2.03 a gallon. Natural gas for December delivery rose 9 cents to $4.515 per 1,000 cubic feet.
In London, Brent crude for January delivery rose $1.96 to $79.16 on the ICE Futures exchange.
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Associated Press writer Barry Hatton in Lisbon, Portugal, contributed to this report.
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